In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Risk Assets Holding on by a Thread
Risk assets have been under consistent selling pressure for some time now. The Russell 2000 and Bitcoin are both excellent examples of the damage that’s already taken place. Both are holding on by a thread at crucial support levels. As you can see in the chart, for Bitcoin, the 2017 highs around $20,000 are the level we're watching. For small-cap stocks, the line in the sand is at the 2018 and 2020 highs around 171.
If the Russell 2000 and Bitcoin continue to hold these key levels, things are likely improving for stocks and cryptos more broadly. However, if they violate their respective support levels, we have to anticipate increased volatility and another leg lower for risk assets.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Structural Damage For Smalls
Equities all around the world are having a brutal start to the summer as selling pressure spreads across the board. All of the US major averages are completing tops and registering new closing lows.
The Small Cap Russell 2000 Index has been the weakest as IWM is currently testing a critical support zone at its 2018 and 2020 highs. We will be watching closely in the coming days to see how prices react to this area of former resistance turned support.
Bulls want to see this level hold. However, if price violates these former highs, we have to anticipate another leg lower and increased selling pressure for stocks more broadly. Seeing more and more risk assets fall back below their 2018 and 2020 highs is a big feather in the hat for bears. The S&P 500 is still about 7% above its 2020 highs of 3400.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Yen Leads Rates Higher
The Japanese yen has been front and center, and for good reason. It won’t stop falling. Notice the strong relationship between the USD/JPY cross and the US 10-year yield illustrated in the overlay chart with a 26-day correlation study in the lower pane. Interestingly, this strong positive correlation all centers around the Bank of Japan’s effort to put a cap on interest rates. They achieve this by going into the open market to purchase Japanese Government bonds. As such, the BOJ has to reduce US Treasury purchases, and this is putting upward pressure on the US 10-year yield. As long as this remains their strategy, the strong relationship between these markets should hold.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
The Impact of a Higher Dollar
We’ve talked a lot about the implications of a higher dollar. Long story short, it means lower prices for risk assets. This includes US stocks, commodities, and especially international stocks. They should all enjoy a tailwind if the dollar is to fail and roll over at these former highs.
Overlaying growth stocks such as the ARK Innovation ETF with the Dollar Index gives us a nice visual of this relationship. Look at the large base in DXY that has formed since its 2020 peak. If we were to invert that DXY chart it would fit seamlessly with the distribution pattern in ARKK, shown below. The two have a very strong negative correlation.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Major Levels
The Dollar Index and rates are the two most important charts on the planet right now, and they’re both rolling over. If these two critical areas of the market catch lower, it should provide a much-needed boost to a stock market still grappling with selling pressure. A weaker dollar lifts all risk assets, while lower rates should impact the most beaten down areas, primarily tech. If these tops resolve lower and stocks don’t catch a bid, it raises an important question: What will it take for stocks to rally?
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
A Record-Setting Slide
The S&P 500 just booked its seventh consecutive down week. This is only the fourth time in history that the index has registered so many consecutive losing weeks.
When we look back at the last three instances, the forward returns are mixed. The last time we experienced so many consecutive losing weeks was in the middle of the dot-com bubble crash in 2001. This was not a good time to buy stocks.
On the other hand, when this happened back in 1970 it coincided with a major bottom. As for the instance in 1980, the forward returns were excellent, but a multi-year bear market followed soon after.
While this stat doesn’t give us an actionable signal over any material timeframe, it does suggest that markets are due for a relief rally.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
S&P 500 Tests a Key Level
Equities continue to look vulnerable as sellers remain in full control. When it comes to the major averages, we’ve had our eyes on the AVWAP from the COVID lows. In late April, the Russell 2000 and Nasdaq 100 violated these levels and followed it up with a fresh leg to the downside. Markets have continued to sell off since.
Today, all eyes are on the S&P 500 which is now challenging its AVWAP from the COVID lows. This level represents the price the average investor has paid since March 2020, making it a critical level of interest.
What this really means is the average buyer since that time is now in a loss position. While this would be a logical place for bulls to step in and stop the carnage, we’re not seeing any sign of it yet. Until we do, be prepared for heightened volatility and further downside.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Losing Value
Markets have been selling off indiscriminately since last week. Even the strongest stocks are under pressure as we're seeing more and more indexes resolve lower from distribution patterns and violate critical support levels. An excellent example of this is the small cap value ETF (IWN). IWN has successfully defended its range lows for the past several months as its peers have broken down. Now that it has resolved to the downside too, we can add it to our growing list of completed tops. If the strongest can't survive and hold their levels, what does that say about the rest of the market? Long story short, this action is not bullish.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Indexes Hit New Lows
We’re seeing more and more stocks and indexes resolve lower from distribution patterns and violate critical support levels. Many more are on the brink, challenging pivot lows and threatening to follow their path.
The Nasdaq 100 (QQQ) and Russell 2000 (IWM) are excellent examples of this as both are violating their recent lows and resolving to the downside. We’re paying extra special attention to these patterns as their breakdown levels coincide with the AVWAPs from the COVID lows. These levels represent the price the average investor has paid for shares since March 2020, making them logical potential support zones.
Now that these indexes have taken out the confluence of support at their pivot lows, we’re likely to see further downside and increased volatility. Bulls need to come out and repair this damage immediately.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Selling Spreads
Speaking of leaders, even the strongest stocks have come under pressure in recent sessions. There was no good place to hide toward the end of last week as stocks were being sold indiscriminately. We saw the start of this on Thursday as the market leaders came under serious pressure. Friday, that volatility accelerated as investors shrugged off record earnings numbers and took profits across the board.
Over the past few months, we’ve seen money rotate into defensive groups or growth stocks in sessions where cyclical stocks have sold off. That wasn’t the case last week as the market was a sea of red.
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
Tech Weighs Heavy on US Stocks
US equities have outperformed their global counterparts for the better part of the last decade. This is largely attributed to the vast differences between the weighting and composition of US and international markets – mainly, the heavy weighting toward technology in the US and the relative absence of tech outside the US.
The overlay chart of Tech vs. the S&P 500 and the S&P 500 vs. the ACWI All World Index ratios tell the story. Tech dominance in the US strongly correlates with US dominance over global markets. With tech taking the brunt of the recent selling pressure, it calls into question the continued outperformance of US equities. This reiterates the possibility that what has worked for the past decade may not work in the years that lie ahead. Position accordingly…
In this weekly note, we highlight 10 of the most important charts or themes we're currently seeing in asset classes around the world.
A Tale Of Two Markets
2022 has been a tale of two markets. On the one hand, cyclical stocks have shown impressive leadership as they continue to trend higher and make new highs. But then there are growth stocks which continue to lag significantly as they struggle to find a bottom. While this trend is really nothing new, it has accelerated notably in recent months. The bubble chart below is a great way to visualize the dispersion in performance between these two groups of stocks. Whether the leaders catch lower, or the laggards eventually play catch-up is something we’ll have to wait and see. But for now, the two are moving in opposite directions. As long as this is the case, we want to continue positioning ourselves in the strongest groups while staying away from the weakest ones.
