By J.C. Parets & All Star Charts
Wednesday, 14th December, 2022
1/ Defensive Sectors Shine
2/ Mega-Caps Are a Drag
3/ Crude Weighs Heavy on the CAD
4/ Commercial Hedgers Like Gold
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1/ Defensive Sectors Shine
The major U.S. equity indexes have moved sideways to slightly higher over the past month. When we look beneath the surface, leadership from defensive sectors stands out during this period.
The chart below illustrates the one-month sector performance from the various large-cap sector SPDR ETFs.
Money rotated to consumer staples, healthcare, and utilities over the past month. Relative strength from these defensive groups is typical in an environment where the broader market is trending lower. We’re monitoring this risk-off behavior closely as this is not the type of leadership we would expect if the market is entering a new uptrend.
2/ Mega-Caps Are a Drag
The equal-weight Nasdaq 100 (QQEW) has been working on a multi-year bottoming formation relative to the cap-weighted Nasdaq 100 (QQQ) since 2020.
Upside follow-through from current levels could confirm the completion of this reversal pattern, and suggest further underperformance from the biggest tech stocks in the market for the foreseeable future.
Under this scenario, it may be prudent to avoid mega-cap growth stocks while being overweight their smaller counterparts. Expressing a bullish thesis at the index level is not a viable strategy in an environment where mega caps are struggling.
3/ Crude Weighs Heavy on the CAD
Major global currencies are clawing back lost ground as the dollar continues to weaken. The euro and pound have reclaimed critical former support levels, while the yen has snapped back after hitting its 1998 lows from the Asian financial crisis.
Even commodity currencies such as the New Zealand and Australian dollars have taken back key pivot highs from earlier this summer.
But the Canadian dollar (CAD) has not, which could be due to recent weakness in crude oil. The chart below highlights the tight correlation between these assets in the lower pane.
Despite its relative strength during the U.S. dollar rally this year, CAD remains under pressure.
If and when crude oil begins to catch higher, that selling pressure could ease for the Canadian dollar. We could expect an explosive rally in CAD under that scenario, as it catches up to other global currencies.
4/ Commercial Hedgers Like Gold
Precious metals have received plenty of attention in recent weeks. Gold has reclaimed a critical level of former support, while silver has printed fresh six-month highs.
It’s hard to ignore the short-term strength from these metals. Current commercial positioning could further a bullish thesis for gold. The chart below shows gold futures alongside the latest Commitment of Traders (COT) profile in the lower pane:
Commercial hedgers (shown in red) recently held their smallest net short position in three years. Their positioning reached a level corresponding with significant bottoms for gold in 2016 and 2018.
An unwinding in commercial positioning could spark the next sustained rally in gold. With the dollar rolling over and real interest rates beginning to decline, such an unwinding could be likely.
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Originally posted 14th December 2022
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