By J.C. Parets & All Star Charts
Thursday, 23rd March, 2023
1/ The Falling Yields Playbook
2/ Clues From Crypto
3/ Mixed Messages From Financials
4/ It’s Time to Give Bonds a Chance
1/ The Falling Yields Playbook
Growth vs. value ratios are pressing to new highs across the board as technology, communications, and discretionary stocks continue to show strength and resilience through the recent market volatility. Weakness from financials resulting from the recent turmoil in the banking sector has helped fuel the rally in this ratio.
The chart below shows the S&P 500 growth vs. value ratio (IVW/IVE) overlaid with the iShares 20+ Year Treasury Bond ETF (TLT):
It’s not a coincidence that these charts are completing similar rounding bottom formations. Just as bond prices rise when yields fall, growth stocks tend to outperform their value counterparts in falling interest rate environments.
If these new highs in the growth vs. value relationship persist, it could be only a matter of time until TLT and other bond ETFs resolve higher from their reversal patterns. If rates move lower from here, both growth stocks and bonds could outperform.
2/ Clues From Crypto
Technology stocks and Bitcoin (BTC) are back in a leadership role.
As you can see, the technology stocks ETF (XLK) and Bitcoin are both trending higher from rounding bottom patterns. The correlation indicator in the bottom pane of the chart illustrates just how strong of a positive correlation they have.
The new highs in Bitcoin could bode well for tech stocks as XLK attempts to resolve higher from a similar base.
These charts are unlikely to resolve in opposite directions. If BTC can hold above its year-to-date and summer 2022 highs, we could expect large-cap tech stocks to do the same. It could happen sooner rather than later, as XLK just closed at its highest level since last August.
3/ Mixed Messages From Financials
With bank indexes tumbling to fresh multi-year lows, the focus remains on financials. It is uncommon to have a bull market without the participation of financial stocks, so the health of this group is paramount to the overall market.
Here is an overlay chart of the large-cap financials ETF (XLF) and small-cap financials ETF (PSCF):
Analyzing the most recent price action, we see a divergence forming as PSCF made a lower high and lower low this year, while XLF made a higher high and higher low.
Will large-cap financials catch lower and mirror the weakness we’re seeing from their small-cap peers? Based on the weight of the evidence, the odds of this could be increasing.
4/ It’s Time to Give Bonds a Chance
The Fed raised interest rates by 25 basis points (bps) yesterday, with Chair Jerome Powell suggesting a pause in the hiking cycle. This could bode well for the bond market.
The chart below shows the 7-10 Year U.S. Treasury Bond ETF (IEF):
If and when IEF reclaims the critical shelf of former lows at approximately 100, the path of least resistance could be higher.
That could be a big development for the bond market after last year’s historic selloff. A buy signal for bonds could represent a new beginning for the 60/40 portfolio.
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Originally posted 23rd March, 2023
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