From the desk of Steve Strazza @Sstrazza and Ian Culley @IanCulley.
We held our May Monthly Strategy Session Monday night which Premium Members can access and rewatch here.
For these calls, we really take a step back and put things in the context of their structural trends by focusing only on Monthly charts. This is easily one of our most valuable exercises.
In this post, we’ll provide a summary of the call by highlighting three of the most important charts and topics we covered along with commentary on each.
Let’s get into it.
1. Risk Assets Run Into Resistance Around The World
The growing list of charts at critical inflection points is a major development that continues to unfold. We’re seeing it both in the US and abroad, and monitoring these risk levels closely.
The S&P 500, the Industrial Sector SPDR, the Russell 2000, and the Nasdaq 100 are all hitting our upside objectives. We would be silly not to pay ourselves and be patient here.
And it’s the same story when you look around the world. Many diversified international indexes like Emerging Markets and Euro Stoxx 600 are at or near key former highs as well. Another one is the All Country World Index Ex-US $ACWX. Here it is, approaching a logical level of supply at its old all-time high.
Since January, price has been digesting last year’s gains and consolidating at this crucial level. This behavior is evidence of an overwhelming amount of supply at those former 2008 highs near 56. We call this polarity.
If and when the global growth and reflation trade reaccelerates, we have to imagine it’s taking place in an environment where the ACWX is trading free and clear at new record highs.
But until that happens, navigating the markets will most likely demand patience and caution as we continue to see signs of further choppiness ahead.
2. Evidence Suggests More Messy Markets In The Mid-Term
The market continues to provide us with more data suggesting that things will be messier for longer…
We already know that a significant amount of equity indexes are hitting our upside targets and running into logical resistance zones. On top of this, we’re also seeing bearish divergences in momentum and price, as well as some cautionary intermarket flags. None of this was the case just a few months back.
AUD/JPY and High Beta relative to Low Volatility are both excellent risk behavior gauges. Notice the tight correlation between these charts and the S&P 500:
Even though the S&P 500 continues to grind out higher highs, both the AUD/JPY cross and High Beta/Low Vol ratio have been making lower highs since March.
It’s been a beta chase for the last year as investors have bid up some of the riskiest assets at their disposal. Potential divergences like this one suggest that the latest leg higher was NOT fueled by the same risk-on behavior that has supported the rally up until now.
Our most recent leaders, Small and Micro-Caps are also diverging from the S&P in price.
At the same time, divergences and weakness are showing up in momentum and internals as the daily RSI-14 is diverging and unable to achieve overbought on a lot of charts right now, and a growing number of breadth measures are deteriorating and diverging as well.
The current market signals do not change our structural bullish bias. Tactically, we believe we’re likely to be in for a more challenging and volatile market, but there will still be plenty of opportunities.
3. No Change In The Bigger Picture…The Trend Has NOT Changed
Despite risk appetite, internals and momentum not being as supportive as they once were, the major US stock market indexes don’t seem to care at all. They just keep grinding out new highs.
But when we zoom out, the underlying uptrend is still intact.
Here’s a monthly chart of the Dow Jones Industrial Average:
Price broke back above the key 26,700 level last summer and continues to move higher.
So while near-term conditions may prove frustrating, we need to remember one of the most important Dow Theory Tenets…the trend persists until its reversal has been signaled.
Those are some of the main takeaways from this month’s strategy session.
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