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 a number of critical Stock Market Indexes and Sectors, as well as assets in the FICC Markets that are approaching logical levels of overhead supply and pose the question… “Are risk assets due for some corrective action or consolidation?”
Many of these are the same cyclical areas we’ve covered recently. The fact they are approaching levels of interest doesn’t mean the risk-on trade is over. In fact, we think it’s quite the opposite. After some very strong initial price action from a wide variety of offensive assets, a pause here is warranted. In this post, we’ll outline a number of charts we’re watching closely in the weeks/months ahead to see how these trends develop.
Let’s kick things off with our US Index ETF list.
We’ve been very bullish on Dow Transports $DJT recently. They’ve had a great run over the past several months and now with price sitting less than 4% off fresh 52-week highs, we think it may be time for Dow Industrials $DJI to make a nice catch-up move to their Dow Theory counterparts. Read JC’s article from today for more on this topic. Either way, this should bode well for Industrials as a sector.
Let’s take a look at last week’s biggest loser which also happens to be one of the long-term laggards among the major US Indexes. After some recent strength out of the SMID-Cap space in recent months, it looks like at least one of these groups may be losing steam. Here it is… The S&P Mid-Cap 400 $MDY.
Mid-Caps were unable to follow through on their new incremental high as price rolled over last week, confirming a failed breakout and bearish momentum divergence. Notice, how momentum was also unable to attain an overbought reading to confirm the latest new high. We definitely want to add this one to the list of key charts at potential levels of resistance.
With that said, the picture is quite different when looking at the Small-Cap Russell 2000 $IWM and Russell Micro-Cap Index $IWC.
In contrast to their Mid-Cap peers, prices are consolidating constructively ABOVE their June highs and momentum (not shown) registered overbought readings to support the recent breakouts in both Indexes. This action looks like nothing more than an orderly retest for now.
Now for our leader. Here’s the Nasdaq 100 $QQQ hitting potential resistance at its first extension level of the Q1 drawdown.
In fact, the Nasdaq 100 is running into a confluence of resistance on both short and long-term timeframes as key Fibonacci extensions from both the Dot-Com Bubble and Covid-19 Crash are converging at current prices.
In case that’s not enough, the Nasdaq 100 Index $NDX is also running straight into its former all-time highs relative to the broader market.
After 20-years of basing, do we really want to make the bet that this ratio resolves higher on the first test? Anything could happen, but it’s the lower probability outcome in our opinion. Some churn here would actually be quite healthy after such a strong run-up in recent years.
The Nasdaq 100 is the Stock Markets secular leader so how it reacts at this critical level will give us some major clues as to what to anticipate for US Equities in the months ahead.
It’s no secret the S&P 500 $SPY finally made its long-awaited new high last week. JC also touched on this in his post.
Although, when we look around the world, the US isn’t the only global leader running into key former highs. Here’s our Global Stock Indexes table, showing only the US and China positive on the week.
Here’s a bonus chart of the Taiwan Stock Exchange. While it’s not on our list, the country plays a crucial role in the global economy and has been one of the top-performing International Equity Markets in the world.
And here’s a little excerpt of what Bruni had to say about it in a recent post for our All Star Charts India Premium Members:
It broke out to new all-time highs, but momentum diverged negatively and prices pulled back to their breakout level last week. Is this a simple retest before further upside? Or will this turn into a failed breakout that signals tougher times ahead for risk assets? Our level is 12,200, so we’re watching that very closely.
Let’s stick with the topic of World Equity Markets and transition to our International ETF table. Most everything was lower on the week outside of the S&P Global 100 $IOO and Frontier Markets $FM.
These charts couldn’t look any more different though. The S&P Global 100 is coming off three consecutive record weekly closing highs. Meanwhile, Frontier Markets is squandering beneath significant resistance, just a stone’s throw away from its all-time lows.
It’s not just the leaders hitting logical levels of overhead supply. We’re also seeing some of the weakest markets around the world run into resistance.
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Here is Frontier Markets $FM. In order to support a thesis of improving risk-appetite and participation among International Equities, we need to see improvement from this area for more than just a week at a time.
These underdeveloped countries are making new all-time lows relative to the US, and have been for over five years now. After cutting to fresh all-time lows on an absolute basis during the Q1 selloff, Frontier Markets have struggled to reclaim former support, turned resistance at their key former lows from 2015-2016.
If we get some broad market weakness, this is an area we’ll look to for short opportunities. At the index level, if we’re not above former support around 24, the bias is lower and we’d anticipate a move down towards 19.50 over the next 1-3 months.
Let’s take a look at our Sector ETF table now.
One area that continues to look great and has seen strong rotation this month is Consumer Discretionary $XLY. The sector has just about doubled the performance of the broader market over the trailing month. This relative strength can be visualized in the lower pane of the chart.
Discretionary broke out to all-time highs relative to Consumer Staples $XLP as well as the S&P 500 this month. We can add all these charts to our list of bullish risk appetite indicators.
As for our Factor ETF table, it was another big week for Growth which just about doubled the performance of all its peers. Nothing new to see here!
The only other Factor that posted positive performance last week was S&P High Quality $SPHQ, which in recent months has asserted itself as a leader across all timeframes. Here’s the chart.
Price just broke out to fresh all-time highs. We want be long SPHQ as long as we’re above 38 with a 1-3 month target at 45.50.
Some other Factors we track and are currently paying close attention to right now but are not in the table above, are Mega-Caps $MGC and Momentum $MTUM. Both recently made new record highs similar to Quality, above. We’re watching these charts as closely as any right now. Read why this is in JC’s post.
Here is our Industry ETF table.
Let’s look at another example of how these key resistance levels aren’t discriminating between the leaders and laggards. Stealing from our friend and colleague Ari Wald, Head of Technical Analysis at Oppenheimer Funds, we always want to identify the “Sector Culprits” and monitor them closely as a way to identify early signs of market weakness.
Well, Banks are definitely one of those areas, so let’s see what the SPDR S&P Bank ETF $KBE is telling us right now.
While the strongest areas simply retested their 2018 lows during the Q1 crash and never looked back, the weakest areas broke below them and remain trapped beneath their former support levels. Banks are a great example. After making a failed attempt to resolve higher in June, momentum is waning and price appears to be topping out beneath this key level.
Bulls really want to see this ETF get back above 35. It will be hard for Large-Cap Financials $XLF to outperform without strong participation from their largest weightings.
Now for contrast, here’s Home Construction ETF $ITB. This subsector has been an absolute monster off the March lows, tacking on well over 100%. Similar to Banks, this leader is also at logical level of overhead supply.
Although in stark contrast to banks, ITB is merely running into a logical level for some consolidation at our price objective. There are no dead bodies or layers of decade-long overhead supply to work through, like there is for Banks. Either way, both are at levels where we’d anticipate some sideways action.
Let’s segway now from Home Builders to Lumber as the two are highly correlated. Here is our Commodities table. Lumber has been the shining star for months now, and just tacked on an additional 14% this week.
There may be no logical level of overhead supply on the Lumber chart, but this kind of parabolic uptrend can’t persist forever. Considering its daily momentum reading is at its highest level in over 50-years, we think this is as good a place as any for Lumber to correct through time, or most likely, price. If you’re long, consider taking profits. There are better opportunities right now.
We’ve discussed its relative strength vs other Commodities such as Gold. Last week, it broke out to its highest level relative to stocks since 2013. Despite being stretched in the near-term, the recent price action from Lumber is incredibly bullish for markets and the economy over intermediate and longer-term timeframes.
Let’s check in on another important, economically-sensitive Commodity. Copper has been struggling at the key $3 level we’ve been watching since early July. On the positive side, buyers are testing this level more frequently. On the negative end, price just confirmed a bearish momentum divergence and slight failed breakout.
Will we see a fast move lower in Copper? Or just some more healthy consolidation before price eventually resolves higher? We’ll know soon, and it will be valuable information as strength from Copper is a key tenet for the reflationary thesis.
Now let’s take a look at our Currency table, as the weak US Dollar has acted as a major tailwind for Commodities so far this year.
Here’s a chart that argues against the risk-on rotation thesis. This is the Swiss Franc which is considered a major safe-haven currency similar to the Japanese Yen.
Investors flock to the Franc during times of uncertainty. For this reason, it tends to have a very strong positive correlation with Gold. Notice how both are trending nicely higher.
Will the Swiss Franc follow the yellow metal back to fresh highs? Does this have more to do with risk-aversion or a weak dollar? It doesn’t quite matter as the trend is higher regardless of why, but based on the weight of the evidence we’re seeing we’d argue its the latter.
Last but not least, what’s going on with Bond Markets amid all this?
Even the riskiest securities within the Fixed Income Market are running into potential resistance at key multi-month highs. Here is the High Yield Bond ETF $HYG showing buyers’ inability to take control despite having a handful of chances to break out above 85 since May.
If HYG fails to take out these highs and violates its trendline support, it would NOT be bullish for risk-appetite… and this applies for both the Bond and Stock Markets.
Long story short, while many leading assets are approaching logical areas for consolidation, we need to remember that the primary trends remain higher in these areas. Some digestion of their recent gains would be healthy.
As for the laggards that are hitting key resistance levels, we want to keep an extra close eye on these areas as break downs from the weakest areas can often serve as excellent leading indicators for future market weakness. Considering the increasingly bifurcated market we’re in, it’s certainly a possibility that some of these areas blow right through resistance while others break down.
Regardless of how it plays out, we’ll be watching a variety of things including who might catch some rotation and help pick up the slack, whether participation is broadening or contracting, and how the leaders and laggards are acting. Whatever it is, it should provide valuable insight into relative strength and market internals, as well as an early indication of things to come.
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