From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
We held our September Monthly Strategy Session last night. Premium Members can access and rewatch it here.
Non-members can get a quick recap of the call simply by reading this post each month.
By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.
With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.
1. Waiting for a Resolution
The market remains a range-bound mess as consolidations, and sideways action has become the norm these days. As we’ve continued to say, this is nothing out of the ordinary during the second year of a bull market cycle. And that’s all we think this is.
But of all the markets that have gone nowhere for the last several months, one of the most important has to be the Large-Cap Industrial Sector $XLI.
It turns out that industrials, out of all sectors, historically have had the strongest correlation with the S&P 500.
So if the S&P 500 continues to grind to new highs, we’d expect to see an upside resolution in industrials as confirmation.
But it’s just not happening… at least not yet.
The same can be said for other cyclical sectors like materials and financials.
These are easily some of the most important areas of the US market. Things likely remain messy until XLI and these other more economically sensitive sectors start trending higher along with the major indexes.
But there are signs from overseas that the environment may be shifting in favor of these groups.
2. Global Breadth Is Improving
While much of the world remains a choppy mess, we are beginning to see signs of burgeoning strength beneath the surface.
New 52-week highs from the countries that comprise the FTSE All-World Index $ACWI are expanding as new lows remain nonexistent.
The expansion in participation among global equities is the type of behavior that supports higher prices.
We’re also seeing supportive participation on shorter timeframes as we just got the second-highest reading this year in the percentage of ACWI countries at new 13-week highs.
Improving global breadth is constructive for global equities and risk assets in general.
So if participation continues to expand around the world, we have to ask…
3. Will Global Markets Finally Breakout?
One common theme among risk assets is that many of them are stuck beneath some serious overhead supply. And the All-World Index Ex-US $VEU and Emerging Markets $EEM tell this story well.
Similar to the importance of the resolution in cyclicals in the US, whether or not VEU and EEM can absorb this overhead supply and finally break higher will have major implications on risk assets around the world.
Wherever we go from these key levels will be a critical piece of information…
If the global growth narrative is going to materialize, we have to see these international markets resolve higher.
VEU reclaimed its pre-financial crisis highs in recent sessions. Let’s see if it can stick the landing now.
Even more importantly, let’s see if EEM can follow suit.
If and when both of these international indexes make decisive breakouts to new highs, we’re likely in an environment much more conducive for risk in general.
And the potential for upside resolutions is only becoming more and more likely as market internals continue to improve.
Those are some of the main takeaways from this month’s strategy session.
Thanks for reading, and please let us know if you have any questions!