By J.C. Parets & All Star Charts
Wednesday, 7th December, 2022
1/ Financials Falter
2/ Big Bases in Big Pharma
3/ Dollar Fights Back Against Peso
4/ Tactical Trends Favor Treasurys
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1/ Financials Falter
Following a nearly 20% rally off the October lows, financial stocks just registered their fifth straight day of losses. Since late last week, corrective action has gripped the market as many sectors and indexes are at logical levels of overhead supply.
The chart below shows the large-cap Financial Sector SPDR (XLF) pressing against a critical level of former support which is now acting as resistance.
This polarity zone coincides with a shelf of former lows from last year and the pivot highs from August, making this a logical place for the current rally to take a breather.
In addition, momentum has been making lower highs with each subsequent high in price. Not only is there a potential bearish divergence in place, XLF could not achieve overbought conditions to confirm the latest highs.
We’re monitoring financials to see if they can reclaim this critical level. If they do so, it could be a very constructive development for the broader market.
2/ Big Bases in Big Pharma
Healthcare stocks were a rare bright spot in a sea of red for U.S. equity markets today. When we look beneath the surface at the healthcare space, the leadership from big pharma stands out.
Here is an overlay chart of Bristol Myers Squibb (BMY) and Merck (MRK), two of the largest drug manufacturers in the United States.
Both of these mega-cap pharma stocks are sporting massive basing patterns dating back to their dotcom bubble highs of the late 1990s and early 2000s.
The only material difference between them is that Merck has already made a decisive upside resolution and is enjoying an explosive leg higher. Meanwhile, Bristol Myers Squibb is still absorbing overhead supply at the upper bounds of its range, potentially gearing up for a similar breakout.
These two stocks are positively correlated, as both companies compete within the same industry. As such, the current rally in MRK could be a bullish datapoint for BMY, and BMY could eventually follow higher.
3/ Dollar Fights Back Against Peso
The U.S. Dollar Index (DXY) has run into a logical level of support. While DXY remains relatively flat, the dollar is bouncing higher against commodity-oriented currencies of oil-producing nations. This makes sense given the recent weakness in crude oil futures and its distillates.
The Mexican peso (MXN) provides an excellent example of this development:
The USD/MXN currency pair has reclaimed a critical level of former support after printing fresh two-year lows in recent weeks. Rapid upside thrusts, like the one that occurred recently, could indicate a potential failed breakdown.
Suppose the peso continues to rally and is joined by the Canadian dollar and other commodity currencies. In that case, a more significant risk-off tone could fuel a rebound in the dollar.
For now, dollar strength remains isolated against commodity currencies.
4/ Tactical Trends Favor Treasurys
Bonds have rallied over the past few weeks as yields have retreated. But as we noted yesterday, other long-duration assets, such as growth stocks, have not.
If this dislocation between long-duration assets persists, we could expect bonds to outperform the other major asset classes in the near term. So far, that’s been the case.
The stocks vs. bonds ratio (SPY/TLT) has broken down to fresh multi-month lows:
As technology and growth stocks continue to weigh on the major stock market averages, bonds have been catching a bid across the board. Long-duration Treasury bonds in particular have been leading the charge higher.
Assets that are in strong primary uptrends tend to outperform their alternatives. As such, the recent relative strength from Treasurys suggests this could be the beginning of a sustainable rally for bonds as an asset class. However, much work remains to be done on an absolute basis before we can have any conviction of a rally.
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Originally posted 7th December 2022
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