From the desk of Steve Strazza @Sstrazza
Monday night we held our November Monthly Conference Call, which Premium Members can access and rewatch here.
In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each
Let’s get right into it!
1. Dollar Down. Stocks Up?
The negative correlation between the US dollar and the stock market has been as strong as ever since last year.
When stocks have been in rally-mode, it’s happened in environments where the dollar has been experiencing corrective action. And when stocks have struggled, the dollar has remained strong.
As you can see in the chart, the dollar stopped going up six weeks ago. As a result, stocks have enjoyed a decent run in the time since.
As long as the DXY keeps rolling over, we expect equities and risk assets to continue to benefit.
2. Will Rates Roll with USD?
With the dollar rolling over, all eyes are on yields to see if they will follow.
While the dollar has already broken a multi-month trendline and completed a short-term topping pattern, the same is not quite true for most interest rates.
With both moving together in lockstep for almost a year now, we’re asking ourselves if yields will catch lower with the dollar. The first step in that direction would be a similar trendline violation.
If and when this happens, it could be the boost risk assets need to put in a durable bottom and reverse their trend higher. Based on the weight of the evidence, this is the bet we’re making.
3. International Improvement
When it comes to global equities, there has been material improvement across the board over the past month and a half.
The chart of the Global Dow Index shows buyers stepping in and defending the prior-cycle highs last month. The ensuing rally sent prices back above the June lows. The next key level to the upside is the August high.
Whether you look at Europe, Asia or Emerging Markets, the importance of these levels is the same and will set the tone for the market’s next move. Now that most indexes are above their early summer lows, bulls want to see more and more start to reclaim their August highs.
4. Logical Levels
Despite a strong rally off the October lows, many sectors and indices are running into logical levels of overhead supply.
This is particularly true for the Dow Jones Composite Index, which recently reached the 161.8% Fibonacci extension of its 2018 drawdown.
This level coincides with a shelf of lows from last year, making for a confluence of resistance and a logical place for the current advance to pause and take a breather.
After some corrective action, we’re looking for this index (and others) to reclaim its former lows from 2021 and take out the August highs. This would be incredibly constructive for the broader market and risk assets in general.
5. Mixed Evidence From Energy
Energy has been the strongest area of the market for the past two years.
However, since the summer, crude oil and energy stocks have been trending in opposite directions. The chart below highlights the widening performance gap between energy-related equities and commodities.
With energy stocks continuing to show relative strength as crude oil corrects, we have to give them the benefit of the doubt and err in the direction of the underlying uptrend. With that said, crude oil and its derivatives look rather vulnerable as they test their prior-cycle highs from above. If we start to lose these key levels, it will represent structural damage, and this is likely happening in an environment where energy stocks are also catching lower.
For now, the market is telling us that stocks are the best way to express a bullish thesis in energy. Under this scenario, we want to keep looking for opportunities in this space and overweight energy over other areas.
As always, Premium Members can rewatch the Conference Call and view the slides here!
We hope you enjoyed our recap of this month’s call. Thanks for reading, and please reach out to us with any questions!