There was also plenty of evidence from our intermarket relationships and ratios to support these moves. Discretionary-versus-staples ratios broke to fresh highs. Copper versus gold. Stocks versus bonds. Inflation expectations. They all made new highs recently. But, just like most stocks on an absolute basis, many of these breakouts have since failed.
Of all these developments, it's hard to argue that any is more important than the stocks-versus-bonds ratio retracing back beneath its Q1 highs. With long rates making new lows and stocks selling off, let's talk about how we are approaching both of these asset classes right now.
Here's the S&P 500 $SPY relative to long-term Treasury bonds $TLT, zoomed out to the early 2000s.
Instead of fresh legs higher, investors were dealt a handful of downside reversals and failed moves. Last week, we went from discussing breakouts and new highs for stocks... to throwbacks and retests of old ranges. This all happened in the matter of a few trading sessions.
A lot has changed in a short period. In times like these, it’s important to take a good look under the hood to see what market internals are suggesting.
As we reviewed our breadth chartbook today, we asked ourselves the following questions:
Are we seeing a notable expansion in new lows? Is it enough that we should be worried?
Let’s take a look beneath the surface and see if we can find some answers!
First, let’s check in on the 21-day and 63-day lows for the S&P 500:
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Over the past few weeks we’ve seen a handful of major indexes, like small and mid-caps, resolve higher and kick off a fresh up leg. But breadth has really cooled off since then, as participation has been declining despite the major averages rallying.
This week, we’re finally seeing that weakness show up at the index level -- particularly from SMIDs and cyclicals.
When we were reviewing our breadth charts, we noticed the deterioration in energy sector internals has been particularly bad. Not only is breadth not confirming the new highs from energy stocks… but there are actually some pretty ugly divergences in our new high indicators.
Energy stocks are currently vulnerable, sitting just above their breakout level at former resistance. Considering the lack of support from internals, this group is on failed breakout watch.
Let’s take a look under the hood and discuss what we’re seeing.
Energy has been coiling in a continuation pattern above its year-to-date highs around 56 for over a month now. You can see this in the upper pane of this chart:
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Everything's falling into place for the bulls.
Mid-caps and small-caps finally joined their large-cap peers at new record highs earlier this month. A bullish expansion in breadth is confirming these breakouts at the index level.
We're also seeing strong confirmation in the form of other risk assets resolving above key levels of interest.
As suspected, our risk checklist has moved up to its highest level since we began tracking it this summer. This list does an excellent job summarizing the global landscape.
Despite the new highs from almost all the large-cap major averages, we had yet to see new highs in their corresponding advance-decline lines.
We also hadn’t experienced the kind of expansion in participation that we’d expect to accompany the indexes to new price highs.
Our new high indicators were still muted, even on shorter timeframes.
But that was last week. This week, mid-caps and small-caps have joined their large-cap peers at new record highs after making decisive upside resolutions from their year-to-date ranges.
And guess what? We’re finally getting that breadth confirmation we were missing.
Let’s talk about it.
First, here’s a quick update on the advance-decline lines that we covered in last week's column:
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
While breadth has improved in recent weeks and months, the bulls still have their work cut out for them.
When we consider all our breadth indicators in aggregate, the evidence remains mixed. What else is new!? It’s been that way for the majority of this year.
Many of the major indexes made new all-time highs this week. Meanwhile, some advance-decline lines are moving higher, but others are moving lower. Some are at the top of their range, but others are at the bottom of theirs.
The advance-decline line measures stock market breadth based on cumulative net advances. In other words, it takes the number of advancing stocks on a given day and subtracts the number of declining stocks. That number is then added to the previous day’s value, creating a cumulative advance-decline line.
A/D line divergences occur when price is making new highs and the A/D line is NOT.
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
September saw significant selling pressure in equity markets. The S&P 500 suffered its worst drawdown since last year, and many of the major indexes made a lower low. But when we look under the surface, it really wasn’t that bad.
We didn’t get an expansion in new lows to confirm the new lows in price. Instead, these readings remained muted across most of the major averages in the US.
Since then, the bulls have regained control. Breadth has improved throughout October as the indexes have rallied back toward their former highs. Although we haven’t seen a real expansion in participation at the index level, things have definitely been moving in the right direction.
Let's talk about it.
Here’s a look down the cap scale at new 52-week highs for all three S&P indexes, from large to small:
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Most risk assets peaked during Q1 or May of this year and have consolidated in sideways ranges ever since.
But the bulls have started to take control of many of these trends. We're seeing more and more upside resolutions -- and this phenomenon isn't limited to Crude Oil, Rates, AUD/JPY, and cyclical stocks. Similar patterns are also playing out when we look at intermarket ratios, particularly those we use to measure risk appetite.
In today’s post, we'll dive into one of our favorite risk-appetite relationships and check for price confirmation in a variety of ratios.
First up is none other than large-cap consumer discretionary versus consumer staples stocks:
From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Using the S&P 500 as your investment proxy, you’re probably happy with your returns so far this year.
That's even with the 5% pullback we finally saw last week -- the first 5% pullback for the S&P 500 in 2021, and it took 229 trading days.
But the averages aren’t telling the whole story. Some stocks are going up, but most are not. We've been pounding the table about this for months already, and it's been the main theme during the first three quarters of the year.
Unless you’ve been living under a rock, you already know the current environment is an absolute mess, as the weight of the evidence continues to hang in the balance.
In this post, we’ll show you why the S&P 500 is not the stock market and the stock market is not the S&P 500.
When we analyze equities as a “market of stocks” rather than “a stock market,” it becomes clear that we're in the thick of a correction that started as early as Q1.
Here at All Star Charts, we like to call this a stealth correction!
From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Bond yields are breaking higher across the board. So, it’s essential to understand that some stocks do better amid rising rates, while others prosper in markets with low growth and low yields.
For instance, cyclical and value stocks should outperform in a rising rate environment.
Meanwhile, growth, tech stocks, and any long-duration assets (bonds) typically lag. They become less attractive during periods where more economically sensitive areas offer more appealing opportunities.
And we’re already seeing this rotation into the rising rate beneficiaries, while growth stocks have come under pressure in recent weeks.
In today’s post, we’ll look at market internals of these groups to see what they suggest about recent price action.
We can compare growth to cyclicals by analyzing the ratio of Large-Cap Tech $XLK to Energy $XLE.
And we can further illustrate this growth-versus-value relationship through a variety of derivatives. They all tell similar stories.
From the desk of Steve Strazza @Sstrazza and Grant Hawkridge @granthawkridge
Considering the selling pressure in recent weeks, we were very excited to take a look at our breadth indicators today to see if we finally saw some downside expansion worth pointing out. Spoiler alert: There was nothing there.
Being as we're in a sideways market, we're always on the lookout for a change in character in internals that might suggest some resolutions are finally on the horizon. And since bears have been driving stocks lower since early this month, our focus is on new short-term lows.
With the S&P experiencing some volatility and revisiting its 50-day moving average this week, did we finally get that "fall day?"
From the desk of Steven Strazza @Sstrazza and Grant Hawkridge @granthawkridge
In today's post, we’re going to do an update on some of our favorite and most essential intermarket indicators. We’ve also updated our risk checklist so we can discuss the changes that have occurred over the past week or so.
Are market participants embracing more or less risk these days?
We’ll get there.
We've been obnoxious about our theme that this remains a messy environment for stocks, which is nothing but classic "year two" bull market behavior.
But guess what: That’s just what it is right now. You have to play the cards you’re dealt, and right now they’re not the best. This is particularly true for trend-followers like ourselves.
Let’s talk about why.
Our custom “Risk-On” and “Risk-Off” indexes have been a perfect illustration of the 2021 market environment.
This is what a hot mess looks like… and it’s true for both custom indexes as well as the ratio of the two!
