Nothing will frustrate stock market bears more than European Stocks breaking out to new all-time highs!
Do you know anyone who has anything positive to say about European Equities? Are conversations you're having and articles you're reading preaching strength and growth out of this area? I don't.
Prices, however, are telling a different story! Let me point you to the WisdomTree Europe Hedged Equity Fund, which prices European stocks in local currency. This is similar to the $DXJ vs $EWJ Funds in Japan.
The way I see it, this looks like a consolidation within an ongoing uptrend and most likely the beginning of a NEW uptrend, and not near the end of an old one:
Stocks in the U.S. Financials Sector have been underperforming since the beginning of 2018. If you recall, that is precisely when the majority of stocks around the world stopped going up. It's been a sideways grind for many stocks and sectors since then and a solid downtrend for many more, like small-caps, emerging markets and certainly financials, particularly on a relative basis.
A funny thing happened last week, however, while the gossip columns were filled with impeachment talk and upcoming recessions: Financials broke out to new multi-month highs relative to the S&P500. But not a whisper about it anywhere. I like that!
Technology is the largest sector of the market from an indexing perspective, but it's also pervasive because it finds its ways into other sectors/industries and often plays a big role.
With that as our backdrop, it's clear why Technology's relative performance is an important barometer for the health of the market...and it's been quite good since breaking out to new highs in 2016.
So can it continue, or are we due for some TECHnical difficulties in the weeks and months ahead?
We look at a lot of intermarket relationships and try to analyze the same things, but from different perspectives. It's all part of the weight of the evidence approach that we so often preach. Today we're focusing in on the relative strength (or weakness) in Consumer Staples as a heads up for the next move in the US Stock Market.
Consumer Staples are funny bunch. Think about it like this: regardless of how bad the economy might get, as a society we're still going to brush our teeth, wash our dishes, smoke cigarettes and drink beers. Those are Consumer Staples. They tend to be less volatile and underperform when stocks in general are going higher, but outperform when stocks are selling off, for the same reasons.
Weekends are great to just take a step back and see what is actually going on. It's really easy to get caught up in the day to day noise. I talk about the power of Monthly Chart Reviews. This is a similar process, just done more frequently and timeframes are shorter-term. But the taking a step back part follows the same philosophy.
Here are a few things that I'm thinking about this weekend:
I've been in the camp that this 20-month consolidation in the U.S. Stock Market is just that, a consolidation within an ongoing uptrend that started in early 2016, or 2013, or even further back depending on who you ask. I already made my case.
When you factor in the global market conditions, which I've done here, this is an environment where I believe it's easier to get paid buying stocks, not selling them. That could certainly change. Energy could roll over again, Small-caps and Transports could lose their former lows and new downside leadership can emerge. While I think that is the lower probability outcome, it's always an important exercise to consider the other side.
Today we're making the bear case and presenting the evidence that most points to a bearish environment in Q4 and one where we're better off selling stocks, not buying them.
In this Episode of Allstarcharts Weekly, Steve and I talk about how the spike in Crude Oil earlier this week is impacting Energy Stocks. When we look specifically at the Oil & Gas Exploration & Production Index, prices broke down below the 2009 & 2016 lows, only to quickly reverse back above. We also saw this happen in the Oil Services Index. Prices of the $OIH broke below the 2001 lows only to get back above it swiftly. I think if we're above 24 in $XOP and 14 in $OIH, we want to err on the long side. If we are in fact seeing a mean reversion in Energy Stocks, I would image Crude Oil will most likely be flat to up in that environment. The levels are set, now let's see how this plays out!
