Lots of charts are being shared showing the exponential growth in trading activity, new accounts, and anything else that might paint a story of euphoria at retail and discount brokerages since the pandemic broke out.
Here is some personal background only to provide context for what I’m about to discuss.
I live on an island. It is tiny, about 4 square miles. In fact, I live on an obscure island just above Key West which is technically much smaller than that. As a “Census Designated Place” it’s really just a collection of roads and canals, a village of about 4,400 people.
It’s nice, but it comes at the cost of an economy that relies almost entirely on Tourism. The people who live here are more or less fishermen or workers at the many hotels, bars, and restaurants in what’s generally a booming downtown area. Since shutting down our borders months ago, the local unemployment rate has spiked to an estimated 50%.
While we don't know whether or not this can persist indefinitely or if these divergences will soon resolve themselves, we do know that Semiconductors remain one of the secular leaders and are thus an area we want to continue to bet on from the long side.
In this post, we'll outline some Trade Ideas in our favorite Semiconductor names.
Something all of these setups have in common is that they are exhibiting impressive relative strength vs the broader market. They also all resolved to fresh highs recently, which gives us a well-defined risk management level to trade against.
Thanks to everyone who participated in this week's Mystery Chart, as always. Most saw that I was doing it this week and didn't even bother to try guessing, simply stating that they were buyers of this massive base breakout on any pullbacks.
JC summed up our present view on US Equities perfectly during this week's Conference Call:
"There are stocks we want to buy, and there are stocks we want to sell," he told Premium Members on Monday night.
Some areas, particularly the secular leaders coming into the selloff, continue to trend aggressively higher while others refuse to participate in any meaningful upside.
A great example of this is illustrated by contrasting the chart of the Dow Jones Transports (DJT) to what we consider the "New Dow Theory" Average, the PHLX Semiconductor Index (SOX).
For those new to the exercise, we take a chart of interest and remove the x/y-axes and any other labels that would help identify it. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. Maybe it’s a custom index or inverted, who knows!
We do all this to put aside the biases we have associated with this specific security/the market and come to a conclusion based solely on price.
You can guess what it is if you must, but the real value comes from sharing what you would do right now. Buy, Sell, or Do Nothing?
Every weekend we publish performance tables for a variety of different asset classes and categories along with commentary on each.
This week's main theme is that the strong continue to get stronger and vice versa, which we'll highlight in our Industry and Sector ETF tables, below.
Notice how the top three performers this week also happen to be the only Industry ETFs that are positive over the trailing 3-month period?
Gold Miners (GDX), Biotech (IBB), and Internet (FDN) posting positive 3-month returns may not sound like much but is actually quite impressive as it means these areas have already taken out their highs from just before the broader market peaked and collapsed in February.
Is the Helsinki 25 Index not on your radar? Well it probably should be. It's hard to find a better gauge of risk appetite and risk aversion anywhere out there in the world.
Take a look at a chart of this rarely discussed index over the past half decade. Finland is where we want to be looking. In this case we're comparing it to the Allstarcharts Global Top 10 Index where we are equally-weighting the 10 largest markets around the world. See any similarities?
In March, the up move and subsequent retracement in Bonds was breathtaking and had the world's attention.
In April, Bonds spent most of the month "normalizing," at a newer, higher level.
Here in May, we're starting to see signs that another move to the upside is materializing. Here's a quote from JC in a recent email to All Star Chart subscribers:
If you're looking for an uptrend, it's in the bond market, NOT the stock market.
...the technical setup in Treasuries looks much better than it does for Stocks right now, over both long and short-term timeframes. TLT is trading just a few percent off all-time highs as price just broke above a confluence of resistance.
And here's the chart of relative strength between $TLT and $SPY that adds further evidence of a resumption of trend for TLT:
This week's Mystery Chart was a simple yet pivotal one... it was a ratio chart of Stocks vs Treasury Bonds.
With stocks struggling at resistance this week and Treasuries meandering beneath all-time highs, both appear to be at key inflection points.
Making things even more interesting is that the S&P 500 (SPY) relative to 20+ Year Treasury Bonds (TLT) ratio is also at a key level of interest. It is make-or-break time for these two asset classes so let's dive in and see what's going on.
Breadth divergences from earlier this year took a while to confirm, but once they did we saw considerable downside.
My Chart Summit Presentation was on how I use statistics and scans to visualize market internals for insight on breadth and relative strength. I used tables from our Weekly Momentum Reports in January and February to illustrate the clear deterioration in participation taking place at the time despite the major indexes grinding to new highs.
In this post, we’ll do a similar exercise and use stats to analyze whether breadth has been improving or deteriorating in Global Equity Markets over the past month.
