By J.C. Parets & All Star Charts
Monday, 11th December, 2022
1/ Energy Fails at Former Highs
2/ US Leadership in Jeopardy
3/ Intermarket Ratios Suggest Lower Rates
4/ Dollar Tailwinds
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1/ Energy Fails at Former Highs
When it comes to energy stocks, the recent rally stalled out right at the year-to-date highs. This is true not only on absolute terms but also relative to the broader market.
The chart below highlights both the absolute price trend (upper pane) and the relative trend (lower pane) between the SPDR Energy Sector ETF (XLE) and the S&P 500 (SPY).
XLE was able to sustain new highs relative to the broader market for a few weeks before violating its trendline and rolling over last week. As for absolute prices, sellers entered the market and stifled the current rally at the June highs.
Seeing price fail at such a critical level is concerning for the broader uptrend in energy stocks. We could anticipate further corrective action in the coming weeks and months.
2/ US Leadership in Jeopardy
Although international equities have been underperforming their U.S. peers for over a decade, there could be evidence of a shift underway.
The iShares MSCI EAFE Index (EFA) just confirmed a bullish momentum divergence and violated a multi-year downtrend line relative to the S&P 500 (SPY). It also achieved an overbought momentum reading to confirm the trendline break.
These are only tactical improvements, and there is still much work to be done before we can confirm a shift in the structural trend. As such, these are some of the first technical characteristics we tend to see in the early stages of a trend reversal. On a relative stage, the winds could be starting to move in favor of international equities.
3/ Intermarket Ratios Suggest Lower Rates
The U.S. 10-year Treasury yield recently reached its highest level in a decade. Meanwhile, regional banks (KRE), which tend to outperform in rising interest rate environments, have been unable to catch a relative bid against real estate (IYR), which typically underperforms when rates rise.
This is just one of many intermarket ratios which have failed to confirm the historic ascent in interest rates since last year.
The lack of confirmation has been a dominant theme for over a year now. Rates have continued to rise steadily around the world even as this ratio has traded sideways since early 2021.
If KRE/IYR were to resolve higher from this consolidation, it could go a long way in confirming the primary uptrend in Treasury yields. On the other hand, we could expect this ratio to resolve lower in an environment where yields have peaked and are rolling over. For now, it isn’t giving us much information in either direction.
4/ Dollar Tailwinds
Since the U.S. dollar peaked in late September, commodities and international equities have stood out as leadership groups among all asset classes.
The iShares Silver Trust (SLV) and the iShares MSCI EAFE Index (EFA) have risen 23% and 19%, respectively.
When the dollar depreciates, dollar-denominated assets become cheaper, spurring economic activity and investment. A falling dollar is also synonymous with increased risk-seeking behavior among investors. This is exactly what we’ve been observing since the U.S. Dollar Index (DXY) peaked in late September.
Even some of the most beaten-down groups, such as international stocks and precious metals, have rallied significantly. We could expect these dollar tailwinds to persist and drive risk assets higher into 2023.
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Originally posted 12th December 2022
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