We’re looking for trends.
That’s why Technical Analysis works. Because stock market returns are not normally distributed. We have the data. It’s not a secret.
Stocks trend. They go up for a while, they go down for a while and sometimes they can go sideways for a while.
Interest rates, commodities and currencies all act the same way. That’s just how markets behave.
You can choose to pretend that it’s not that way.
But we have the math that proves that it is.
So that’s why we do this. That’s why we rip through thousands of charts every week to identify which ways things are going.
Here’s one of the biggest charts that continues to point to any choppy environment just being part of a bigger uptrend for stocks and risk assets:
It comes down to credit. We’ve talked about this a lot. If we’re not seeing any stress in credit, the market is fine bigger picture.
Let’s keep in mind what it looked like last year, and many other market tops before that:
There is wisdom in the bond market. And so far, it continues to point to this NOT being a repeat of 2020, or Q4 2018 for that matter.
The weakness can be seen more so in the specific sectors. Here’s a look at how they’ve done since September 2nd, when the rotation into Value first got started:
Look at the outperformance out of those Value sectors, specifically Energy, Financials, Materials and Industrials.
This Value rotation really accelerated in 2021:
The Nasdaq100 is not “the stock market”. You can’t be “the stock market” without exposure to Financials and Natural Resources. You’re just “a segment” of the market without that other stuff.
I think a lot of investors are learning this the hard way.
Technology is definitely the culprit here, representing 39% of the Growth Index and 44% of the Nasdaq100. That’s a lot.
Here’s what’s going on in Technology. So far, Tech is holding those former levels of resistance last year. That points to this just being a mess, rather than the start of a severe downtrend.
Underperforming? Sure. Crashing? No.
While most of the stock markets around the world churn, you can find another culprit in Crude Oil as it sits below all of this overhead supply near 66:
You can see just how important this levels is going back years. The market is obviously acknowledging this overhead supply.
Crude Oil’s high correlation with risk appetite in recent years is further evidence of a messy environment short-term, within a strong environment bigger picture.
How long is this messy market here to stay?
I continue to point to the Copper/Gold ratio as a tremendous indicator here:
How this ratio resolves is going to tell us a lot about the appetite for risk.
I believe a downside resolution here would point to a much longer correction into the summer.
An upside resolution would be evidence that we’re in a much stronger market shorter-term, and that any correction is mostly behind us.
Our Weekly Commodities Report was dropped yesterday. I look forward to this one every Friday!
It includes all the Energy Futures, Metals (Precious and Industrial), Ags and so forth. Even if you’re not trading commodity futures, the intermarket relationships offer a ton of information to use in equities and other investments.
A common theme we’re seeing almost everywhere is, “Stuck below overhead supply”, which is why a lot of charts short-term appear “Messy”. The process of demand absorbing supply near critical levels often looks like this.
Emerging Markets are a great example. It’s a mess short-term. And here’s why:
They’re stuck below overhead supply.
Now, I don’t think it’s a coincidence that a messy market across asset classes has coincided with a rising US Dollar.
The falling Dollar has been in sync with risk appetite for years now. That’s not always the case throughout history, but it certainly has been for, at least, the past half decade:
Look for that US Dollar to roll over and look for Energy stocks to finally get back above those former 2016 lows, as evidence that risk is back on and we’re going a lot higher in stocks, rates and natural resources:
How long is it going to take?
I don’t know, but I think these risk gauges above will be some solid evidence.
This is a messy market. I think this chart tells that whole story very well:
When you see these rangebound markets resolving higher, it most likely means we’re out of the woods. These charts need to be above their February highs.
In the meantime, this environment can still be great for all kinds of different investors.
One thing I think will be valuable for everyone is recognizing the relative strength. Which areas are holding up the best? Those aren’t just the ones likely to lead the next charge, but from an intermarket perspective, there’s good information there.
We’ll be right here talking about it.
Tell us what’s on your mind.
What’s got your attention?
Zinfandel and BBQ
Springtime is in the air. You can feel it.
That means BBQ doesn’t it? Or is that just me? haha
You got some ribs or brisket in that smoker?
Get yourself some Dry Creek Valley Zin.
Dry Creek is in the northern part of Sonoma County. It’s my favorite valley to hang out in all of wine country. Napa is cool. Sonoma is cool. But Dry Creek is untouched. It’s almost like going back in time. It’s so peaceful. It’s also further away from San Francisco which helps keep the riffraff away.
Anyway, the climate and soil make for some of the best Zinfandel in the world. The Italians may disagree. They call it Primitivo over there. And the grape is Croatian, so it can all be very confusing.
My point is, trust me: Dry Creek Valley Zinfandel and BBQ.
Call my boy Sebastian at Rancho Maria Wines in Sonoma and he’ll hook you up. Tell him JC sent you!