From the desks of Steve Strazza @Sstrazza and Tom Bruni @BruniCharting
In this post, we’re going to share 10 of the most important charts we’re looking at right now. Some are merely for observational purposes or to highlight some of the broader trends at play in the markets while others are trade ideas in some of our favorite names and areas.
Let’s dive right in. Here they are.
Is The Market “Growing” Out Of This Long-Term Trend?
Could there be a more logical level for this decade-plus structural uptrend in Growth vs Value to pause and reverse? We’re looking at the Russell 1000 Growth $IWF relative to the Russell 1000 Value $IWD ETF. We prefer these to the S&P 500 Growth and Value Indexes as they represent a broader universe of Large-Cap stocks, thus providing a more comprehensive view of this relative trend.
The S&P 500 Growth vs Value ratio was able to break through its key 2000 highs earlier this year and has rallied aggressively higher since. The same is true for Technology $XLK relative to Financials $XLF which has a very strong relationship with Growth vs Value due to the Factors’ respective weightings in these sectors.
IWF vs IWD, on the other hand, just hit a brick wall almost to the penny at its Dot-Com Bubble high. This is one of many ratio charts right now hinting at a potential major bull-bear reversal in the long-term trend. US vs World and Large vs Small-Caps (covered in last week’s Top-10 Report) are two other examples. The question that remains is whether or not we’re simply observing the tendency of momentum to mean-revert in the near-term, which would make this no more than a counter-trend rally… or if the past few weeks’ rotation is the start of something bigger?
The more we see this rotation continue, the more we’ll lean in the direction of the latter. Alternatively, if prices reclaim their all-time highs of 1.66, the dominant trend in favor of Growth remains very much in place.
“DNA-Sequencing” Its Way Off Of Potential Support
The recent flight from Growth is also echoed by the areas sporting the strongest momentum and structural uptrends, as most of them, unsurprisingly are growth industries.
Here is Genomics ETF $ARKG relative to the broader market ($SPY). Genomics has been an absolute monster year-to-date. We recently wrote about wanting to buy weakness in this area and now we’ve got just that.
It was one of the first thematic ETFs to reclaim all-time highs and has steadily outperformed its peer groups, Health Care $XLV and Biotech $IBB, both of which have been strong performers as well. After such a swift move higher on a relative basis, it was only a matter of time until price corrected and digested its recent gains. Now that it has retraced 38.2% of its rally off the December 2018 lows, this ratio looks ready to resume higher, in the direction of the underlying trend.
A lot of the secular leaders look similar to this on a relative basis right now as many have recently taken a breather. These trends remain innocent until proven guilty, and until we see evidence of the contrary we want to continue to buy this rare weakness in these long-term outperformers and bet on a continuation of their primary relative uptrends.
Another “Soft-Landing” For Software
What better example of this is there than Software? Unless you’ve been living under a rock, you know Software $IGV has been consistently outperforming the market for over a decade now. It doesn’t matter what you chart it against, its been grinding straight up and to the right relative to even the strongest Indexes. Take Technology $XLK for example, which has been the best performing sector over the past decade.
When we look at this chart of Software relative to Tech, we have a primary uptrend that resolved higher from a multi-year base in 2017/2018. After some nice follow-through, price recently pulled back and successfully retested its breakout level before continuing higher. After some healthy digestion of its relative outperformance, Software looks ready to rock again. As one of the first industry groups to reclaim its highs, there are currently a plethora of components doing the same and offering favorable setups in the space.
Viva The Leadership In Veeva Systems
Life Sciences software provider, Veeva Systems $VEEV has been one of the top-performing stocks off of the March lows. This name has a ton of momentum right now. Veeva broke out of a roughly 12-month base in April and quickly achieved our initial price target. After consolidating around the 161.8% extension in recent weeks, price resolved to new all-time highs today.
At the same time, price is on the brink of resolving out of a year-long base to fresh all-time highs relative to Technology $XLK. We want to be long this kind of setup all day. A strong stock in a strong sector & industry. An asymmetrical risk/reward profile, and a well-defined level to trade against. We want to own Veeva above 220 with a 1-3 month price target near 273. Depending on your risk-tolerance, you can either set your stop at 220 or the Fibonacci extension level around 214.
Another Software Superstar
Here’s another stock we like long in the Software Industry right now, Okta Inc $OKTA. Same story, just a different name. Similar to Veeva, Okta just resolved higher from a roughly 12-month base on both an absolute basis as well as relative to Technology. It is one of the secular leaders in the space, illustrated by its powerful long-term uptrend.
Price recently threw back to potential support at its 161.8% extension level. It is also testing its breakout level at its former highs relative to Technology. We want to make the bet that buyers will dig in here and defend this strong stock at these logical levels of interest. We want to be long Okta only if price holds above 173 with a 1-3 month price target at 226.
Networking Off A New Low
What about those subsectors within Technology that have yet to reclaim their highs? Do we want to stay away from these areas in favor of the leaders or is there an opportunity for some serious mean-reversion and maybe more?
It depends on where you look, but I’d argue that Networking $IGN would fall into the latter. Prices relative to the S&P 500 have successfully tested support near 0.16 at least five times since 2012, most recently undercutting their lows and whipsawing back above them. This occurred right near the March lows and would’ve served as an excellent buying opportunity. In fact, looking back over the years, every time the ratio bounced off this level has been a great time to bet on Networking, if only for a short-term trade.
The subsector is trying to stair-step its way back towards its former highs just like so many other areas of Tech have already done. Maybe defending this well-tested relative support level yet again will give it the necessary juice to follow in its peers’ footsteps. We like Networking here. With so many big-cap Tech names breaking out recently ala Microsoft, Apple, Adobe, Nvidia, etc – maybe Cisco is next? That would make a lot of sense in an environment where Networking is outperforming as it is one of the largest holdings in the ETF with an almost 9% weighting.
Was That It For The EUR/USD Decline?
The US Dollar Index $DXY is primarily driven by the action in the Euro, as it makes up roughly 60% of the weighting. Over the last few weeks, we’ve seen the Euro/US Dollar pair accelerate to the upside off of long-term support/resistance near 1.05. Despite a multi-year pullback from 1.25 to 1.05, momentum maintained its bullish regime by staying out of oversold territory. Given the recent developments, it’s safe to say that the longer-term trend remains sideways and we should be looking for a move back up towards the 2018 highs over the coming quarters. The direction in which this 1.05-1.25 range resolves will set the secular trend for this pair, but until that happens, we’ve gotta work with what we’ve got…a range.
It’s also worth noting that Commercial Hedgers have a very large net short position in the Euro, which we typically see near meaningful tops, not bottoms. With that said, it wouldn’t be the first time they’ve miss-timed the market (see 2005-2007). Hedgers have very deep pockets, so we’ll continue to monitor their positioning, but these signals are far more important at extremes and when forming a longer-term view. In the short-term, we’re better served to heed the bullish price and momentum characteristics in the Euro. Any weakness in the weeks ahead should be viewed as a buying opportunity to position for a move back towards 1.25.
Is The Dollar’s Run Versus EM Currencies Over?
In our May 13th edition of Top 10 Charts, we put out a trade idea in the WisdomTree Dreyfus Emerging Market Currency ETF $CEW as it held above support at its early 2016 lows. We’re now meeting our price objective near 17.75, so we’re back on the sidelines and seeing how prices react to this particular level. For now, the series of lower highs and lower lows continues, so the expectation is that sellers will re-emerge at current levels.
In addition to watching the price action of the ETF, we’re watching several of its components as pairs like USD/ZAR, USD/COP, USD/TRY, and others pull back to former resistance following their breakouts to new all-time highs. If the US Dollar is going to reassert its strength versus these major Emerging Market currencies, now is the time to do it as prices approach major levels of support and momentum remains in a bullish range. If these breakout retests fail, then we may be seeing a significant shift in the US Dollar’s long-term uptrend relative to many EM currencies.
“Rubber Meeting The Road” In This Commodity
Every now and again we’ll point out some obscure chart that we can use either as a trade idea or for informational purposes to inform our broader-market view.
Today, we’re looking at Rubber Futures, which trade in Asia, and are now breaking back above a multi-year support level near 9,800 to confirm a failed breakdown and bullish momentum divergence. In addition to being a great mean reversion opportunity with 30% upside towards 13,000, it also fits the theme we’re seeing in Base Metals and other Industrial Manufacturing inputs, all of which have stabilized above their March/April lows and are slowly working their way higher. This tells us the market is slowly but surely pricing in more optimistic growth expectations via these Commodities and other intermarket relationships we often discuss in these reports and on the blog.
Putting The “Reflation Trade” Into Perspective
Speaking of that “reflation trade” we just discussed with our Rubber Futures chart, the Copper/Gold ratio recently put in a failed breakdown below a multi-decade support level and is now working its way higher. We’re seeing similar action in other intermarket relationships that track growth expectations like Regional Banks relative to REITs or the S&P 500, Treasury Inflation-Protected Securities relative to Treasury Bonds of a similar duration, and several others.
While these long-term levels of support could be potential inflection points that spark new multi-year moves to the upside, it’s important to remember that all of these ratios are still in secular downtrends. A few weeks to months of positive price action does not reverse a massive downtrend in Rates/Inflation Expectations. Long-term trend reversals have to start somewhere and this would be a “logical” level for many of these charts to begin reversing course, but it’s likely to be a messy process that takes many quarters/years before we see them all trending higher in tandem.
Know your timeframe. If you’ve been trading this bounce and have made money over the last few months, that’s great. But if you’ve got a multi-quarter, multi-year timeframe, then putting this move into its longer-term context is extremely important.
Those are the top 10 charts of the week!
Thanks for reading and please let us know if you have any questions!