Commodities and Currencies are telling an interesting story. When you go through each of them one by one, you start to recognize ongoing themes, whether in energy, metals or agriculture. In addition, based on specific strength and weakness in different currencies around the globe, that information can be used in multiple ways. Using intermarket analysis, we can take that information and use it in the equities market, or go ahead and trade the commodities and currencies directly using Futures, Forex or ETFs. Either way, it's worth doing the homework.
I just finished my Commodities and Currencies review and updated all of them in the Chartbook. It's nice to see Oil and Copper rallying as we discussed in the most recent letter. I think this theme continues
After doing my U.S. Sector and Sub-sector review, there is a common theme that I think is worth pointing out. Structurally speaking, things now look worse. The best sectors that had been leading are now breaking uptrend lines and key support. Meanwhile, the laggards continue to hit new lows. Things overall have worsened in my opinion.
Now, short-term we had a lot of very specific downside targets in most sectors coming into the new year. Over the past week and a half I would say that a very large majority of the S&P sectors and sub-sectors have now achieved those downside objectives. I've been very clear about where we want to cover tactical shorts and they are detailed in the Chartbook. Going forward we would much rather be sellers of strength, than buyers of dips, although there are a few exceptions.
Going country by country all over the world is one of the best tools that we have as market participants. The value that I’ve gotten over the years from looking at the behavior of all of the countries, instead of just the U.S. is a huge factor in why I am such a top/down weight-of-the-evidence guy. There are signs of strength and weakness that we see from international markets that might not be so obvious in the S&P500, for example.
Last September, I promise you that the reason I got bullish tactically was not because of what I was seeing in the United States, but what was happening around the world. There were simply too many bullish momentum divergences and downside objective achieved internationally to ignore. Something was up, and in fact, the counter-trend rally that we got in the U.S. actually exceeded my expectations.
When we talk about leadership in the market, I think it's important to go sector by sector to see where the leaders are and where the laggards might be. To help with this study, we take a look at each of the 10 S&P Sectors and compare them to the performance of the S&P500. This Relative Strength Analysis is one of the best ways to see sector rotation and changes in market leadership.
I have just updated all of the Sector vs S&P500 charts in the ChartBook and here are some of my notes:
As you guys know very well, we have wanted to be short the majority of the U.S. Sectors and Sub-sectors coming into the new year. While we still have much lower downside targets from a structural perspective, tactically speaking, many of our targets were hit this week. This is where we wanted to be covering short positions and, for the most part, looking to reinitiate short positions if and when we get a corrective rally. I have just updated all of the U.S. Sectors and Sub-sectors and they can be seen in the ChartBook.
