From the desk of Steve Strazza @Sstrazza
At the beginning of each week, we publish performance tables for a variety of different asset classes and categories along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the relative strength trends at play and preview some of the things we’re watching in order to profit in the current market environment.
This week, we’re going to highlight the continued outperformance from offensive assets as well as the weakness we’re starting to see from many defensive assets. This kind of action continues to suggest increasing risk-appetite and is supportive of higher prices within Equity and Commodity Markets.
Here is our US Index ETF table. We’ve talked a lot about the strength from former laggards like Transports and SMID’s lately.
What we haven’t touched on too much is last week’s big loser, Utilities. Utilities going up on an absolute basis is never a cause for concern, but when they outperform the broader market it’s usually a sign that investors are cautious about something and we want to pay attention.
Here is the Dow Utilities Average $DJU relative to the S&P 500 $SPY. It’s safe to say they are definitely not outperforming at the present time.
Price has gone sideways for about two decades within the context of a primary downtrend. Further weakness in this ratio towards the 2018 lows would make sense. If that level breaks, we’ll likely see a retest of the early 2000 lows. We’d expect the broader stock market to be doing very well in this kind of environment.
Here is our Sector ETF table. Real Estate $XLRE was lower along with Utilities $XLU on the week. Meanwhile, just about everything else was higher.
These sectors are often referred to as “Bond-Proxies” as they benefit from lower interest rates. You can include Staples $XLP in that group as they have many similar defensive characteristics.
Here is the S&P 500 relative to an equal-weighted index of these three safety sectors. We’ve overlaid a chart of the S&P on an absolute basis as well.
Notice the strong positive correlation between this ratio and the stock market in general? The new relative highs for the S&P vs these sectors is signaling new highs for the broader market as well.
What’s really neat about this ratio is that it can give us clues about the Bond Market in addition to stocks. Here is our Fixed Income table.
Premium Members can log in to access our RPP Report. Please login or start your risk-free 30-day trial today.
Lost Password?
Everything was lower on the week as yields made a nice move higher. Unlike stocks, Treasuries and Fixed Income securities tend to be under pressure when these defensive sectors underperform.
Here is a look at the same ratio- but inverted, along with its rolling quarterly correlation with Long-Term Treasuries $TLT (as opposed to the S&P 500, in the chart above).
This chart tells us that when these sectors are showing weakness vs the broader market, Treasuries tend to be moving lower as well. As such, new all-time lows in this ratio bodes well for higher yields and the reflationary, cyclical assets we’ve discussed in recent weeks… but definitely not for Bond prices.
The bottom line is what we’re seeing from Utilities, Staples, and Real Estate right now suggests higher stock prices and higher yields to come.
Here is our Industry ETF table.
Gold Miners $GDX were the laggard for the week, and Exploration & Production $XOP was the biggest gainer. We’ve talked a lot recently about the first four ETFs on our list and how they have more risk-on characteristics than the others. Continued outperformance from these groups is bullish for Equities and reflective of the healthy risk-appetite we’re also seeing in other areas.
Biotech $IBB is an area we’re still bullish on despite their lackluster performance over the trailing month. Here’s the chart.
The Nasdaq Biotech ETF is retesting its breakout level around 133 after recently resolving higher from a five-year base. There are some great opportunities in this space right now, and the current consolidation has given buyers plenty of time to jump on them.
In fact, we like the entire sector as Large-Cap Health Care $XLV is breaking out of a multi-week range after consolidating just above its prior all-time highs. Read JC’s post about Health Care from this weekend for more.
Let’s shift focus to our Factor ETF table now.
Since we’re discussing defensive assets today, it’s most appropriate to look into the S&P Low Volatility Factor $SPLV, as there should be a lot of overlap with the safety sectors here. The same can be said for the High Dividend Factor $HDV.
Both are trading at fresh all-time lows against the S&P 500 and are in strong, long-term downtrends on a relative basis.
The only factor that has consistently outperformed the overall market over the past several years is Growth $IWF.
Let’s take a look at our International ETF table now.
What is the defensive play among International Equity Markets? I would argue it is the US. We have been the best house on the block for almost a decade now, and investors have gotten used to that. I could even make the argument that they are using US Stocks as a safe-haven asset in this new, low-yielding world we’re in.
As such, it’s no surprise that last week everything on our International list except for Latin America, outperformed the S&P 500.
When investors want to take on more risk, we’ll see capital flow to less developed markets, such as Emerging $EEM, Frontier $FM, and Latin America $ILF. We’re already seeing this transition take place on an intermediate timeframe as Emerging Markets and Latin America are showing impressive relative strength over the trailing quarter.
How about Commodities? Within this asset class, Precious Metals would be considered the defensive area while Lumber, Copper, and Energy are where investors typically go in good times.
There is definitely an interesting dynamic here as Precious Metals have been the big leaders this year. For what it’s worth, they’ve only done it with some major help from fiscal policy and a weaker dollar.
With Gold and Silver hitting overhead supply, could we be seeing a long-term trend reversal in favor of more cyclical groups? Or is this just some reversion to the mean on a relative basis? Not sure, but for now everything seems to be working in the Commodities space. Read last week’s post about Natural Gas for why we like this industry right now.
Now check out this parabolic rally in Lumber, which has nearly tripled off it’s March lows.
Momentum just registered its highest reading in almost 30-years. It may have gone a bit too far, too fast, but it’s definitely not bearish.
Last but not least, let’s check in on our Currency table now. The most important thing to watch here is the US Dollar.
In recent weeks and months, the US Dollar has been lower against every major currency, regardless of its offensive or defensive characteristics. Similar to US Equities, the US Dollar is a safe-haven asset relative to its currency market peers. Seeing the US Dollar weaken relative to other currencies should be expected in a market where investors are seeking excess risk.
The other major safe-haven currency is the Japanese Yen. Notice how both the Yen and US Dollar Index are the worst performers over almost every timeframe? That’s bullish for risk assets.
With the US Dollar Index $DXY trading smack in between our breakdown level of 96 and target in the high 80’s, we really want to pay attention to the near-term price action to see what it’s next move is likely to be. Are we going to see a counter-trend rally or is price more likely to flush lower from here? Not sure yet, but whichever it is, it will have a serious impact on the asset classes above, especially Commodities. A lower dollar would be a tailwind for the whole group.
There’s your Review, Preview, and Profit Report for the week.
Thanks for reading and please let us know if you have any questions.
Allstarcharts Team