From the desk of Steve Strazza @Sstrazza
At the beginning of each week we publish performance tables for a variety of different asset classes and categories along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the relative strength trends at play and give our outlook and some of the things we’re watching for in the week ahead.
This week, we’re going to highlight our US Index and Sector ETF tables and focus on the rotation we’re seeing into more offensive areas of US Equities. We’ll then tie this into what we’re seeing across the FICC universe.
Here is our US Index ETF table. Notice how last week’s winners all have something in common?
The S&P Small $IWM and Mid-Cap $MDY Indexes, as well as Dow Transports $DJT are the worst performers over the trailing year, with the exception of Utilities $DJU. Along with Micro-Caps $IWC, these indexes were the biggest gainers last week. Transports and Small-Caps were up almost 6% each.
Two weeks ago we shared a daily chart of Transports and said to look out for this group, as they had reclaimed key resistance ~9,700 and were pressing on their June highs.
As the group continued to outperform over shorter timeframes, we covered them again last week, but this time with a monthly chart. Here’s what we said:
“Now that prices have retraced more than 62% of their recent drawdown and are comfortably back above overhead supply at their key 2019 lows, the next logical stop would be all-time highs in the 11,300-11,600 range.”
Transports blew through the 9,700 level and are currently trading just beneath 11,000 which puts them within 5% of fresh 52-week highs. And because last week’s candle was so damn pretty, I’d be remiss if I didn’t show you an updated chart again today. Here’s the weekly view.
Read JC’s moring post on Transports for more, including some of our favorite risk/reward setups in the space right now.
Let’s take a look at our US Sector ETF table now. Who were the winners this week? Similar story as above: the only sectors that are negative over the trailing year, with the exception of Real Estate $XLRE.
We’ve discussed these secular laggards a lot recently. Industrials $XLI, Financials $XLF, and Energy $XLE had every chance to break down for the past two months, but sellers couldn’t get it done.
Here’s an updated look at these three sector ETFs.
The bottom line is these weak sectors can’t go sideways forever. So if they refuse to go lower, it’s only a matter of time until buyers take control and drive prices higher.
Industrials outperformed by a wide margin last week and have already begun to resolve higher as XLI is up another 2% this morning and retesting its June highs. Transports are a subsector within Industrials, so this should all make sense. The sector is also at a perfectly logical level to reverse its relative downtrend against the broader market.
This 0.22 level has acted as support and resistance a handful of times over the past 20 years, and after five months of consolidation and chop around it, this ratio looks ready to choose a direction.
Seeing Industrials resolve higher from current levels on both an absolute and relative basis would beg the question: “Are we finally in for a sustained period of rotation into these underperforming cyclical groups?”
It’s still far too soon to make that call, but as more weak sectors and areas resolve higher, the likelihood that the remaining areas do the same only increases. For this reason, we’re on high watch for follow-through from Energy and Financials this week, as we’d expect them to follow in XLI’s path.
Now for our Industry ETF table. No surprises here . . . Banks $KBE, Exploration & Production $XOP, and Aerospace & Defense $ITA were all major outperformers last week.
These groups are some of the main subsectors within Financials, Energy, and Industrials, respectively.
Here is a look at Aerospace & Defense. This has been one of the weakest subsectors within Industrials over the trailing year.
The fact that sellers can’t even take control of the weakest areas in the market is information, and it’s definitely not bearish. As long as ITA can hold above ~160, the bias is higher. It is still a laggard though, so we’d rather be expressing our bullish thesis on Industrials through some of the stronger areas, such as Transportation stocks.
Last but not least for US Equities is our Factor ETF table.
Value $IWD outperformed Growth $IWF for a change, which we would expect during a week where Industrials, Financials, and Energy showed such relative strength. Here’s the ratio.
We definitely want to be open to and even cautious of a failed breakout at this level, but for now it hasn’t happened and the momentum divergence has yet to be confirmed. That can change fast, but as long as we’re above 1.64 we want to continue to favor Growth.
In last week’s post, we mentioned that S&P High Beta $SPHB was above our risk level at 39 and that as long as this remained the case we expected price to head back towards the former highs above 48. Seeing risk-on factors such as $SPHB lead over all short to intermediate-term timeframes is definitely a bullish development.
We’re keeping a close eye on the Value factor this week, as we’d expect it to see some rotation along the same lines as the cyclical sectors discussed above. These themes are very much one and the same.
Now let’s look to our International ETF table to see if the same risk-on, cyclical theme is playing out around the globe.
Based on last week alone, the answer would be “no,” as offensive areas like Emerging Markets $EEM and Latin America $ILF significantly underperformed. Although, let’s zoom out a bit and look at the trailing three-month returns. This has already been a theme internationally, as these two areas have shown significant outperformance over the intermediate-term. Over the coming weeks we’ll be watching these areas closely to see if they can reassert themselves as leaders over the short-term again.
Here is our Commodity table. Huge gains for Natural Gas, Silver, and Lumber last week. That all jives with the risk-on, cyclical theme we’re talking about.
What doesn’t, though, is Copper being lower on the week. After a nice run off the lows, Copper has really cooled off and is now in the red over the trailing month as well.
Price made a fresh 52-week high in July and then paused and consolidated in a tight pennant just beneath the key $3 level. Here’s the chart.
It looks as though it may be resolving to the downside now. This would be a major wrench in the risk-on theme. We want to see Copper not just perform well, but break out with authority similar to the moves we’ve got from other Commodities recently.
As for Currencies, this all makes sense. The Australian Dollar continues to show serious strength.
The currency is as synonymous with Commodities as they come, particularly the base metals space.
Another thing to note here is that the US Dollar is incredibly oversold and likely due for some mean-reversion after breaking down recently. This will have implications and likely put pressure on many other asset classes, just as its weakness had acted as a tailwind for these same areas over the trailing month and quarter.
Lastly, is the Fixed Income arena confirming this bid into more cyclical assets or not?
Well, Treasury Inflation-Protected Securities $TIP led the way last week. These credit instruments tend to outperform when investors are anticipating inflation. Inflation, cyclicality, risk-assets… they all go together. So the Bond Market is also confirming what we saw from US Equities last week.
We’ll be watching all of these risk-on areas across asset classes this week for clues as to whether the current rotation into these more cyclical areas is likely to continue or not.
That’s the Weekly Preview!
Thanks for reading and please let us know if you have any questions.