By J.C. Parets & All Star Charts
1/ Industrials Continue to Shine
2/ Copper Coils
3/ McDonald’s Bulls Are Lovin’ It
4/ Cryptocurrencies Test Summer Highs
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1/ Industrials Continue to Shine
We’ve been emphasizing the relative strength from small caps in recent weeks. We’ve also been discussing the leadership from industrials.
The chart below shows small-cap industrials (PSCI) breaking out of a continuation pattern and reaching new all-time highs relative to the Russell 2000 (IWM).
Whether we are looking at small or large-cap stocks, the relative trends are resolving higher and accelerating in favor of industrials.
As long as the breakout in the PSCI/IWM ratio continues, we could expect industrial stocks to continue outperforming their small-cap peers over the near term.
2/ Copper Coils
As markets focused on the FOMC‘s interest rate decision, copper futures quietly consolidated above a critical level of former resistance.
Last June, copper futures broke down from a 12-month topping formation. The breakdown resulted in a steep selloff that retested copper’s prior-cycle highs from 2018.
As you can see, copper found support at this critical polarity zone as prices have stabilized in a sideways trading range since the summer. Copper is now coiling within a tight consolidation at a critical inflection point.
If the current congestion proves to be a continuation pattern, a downside resolution might not bode well for the economy and risk assets.
On the other hand, an upside breakout in copper could signal improving fundamentals for the global economy, and imply that investors are once again reaching for risk.
3/ McDonald’s Bulls Are Lovin’ It
The Dow Jones Industrial Average (DJIA) has taken on a clear leadership role as it continues to outperform its large-cap counterparts, including the S&P 500 and Nasdaq Composite. This isn’t just taking place on a relative basis, as several component stocks are starting to break out to new highs on absolute terms as well.
McDonald’s (MCD) is among the Dow constituents that notched a new high this week. Here is MCD charted relative to the Dow Jones Industrial Average (DIA):
Studying ratio charts like the one above allows us to identify the strongest stocks within distinct sectors and indexes. It’s a vital component of technical analysis.
When we look at the relative trend for MCD, the ratio is testing the upper bounds of a massive base. After making little progress relative to its benchmark index for over a decade now, it could be time for MCD to assume a leadership role over the intermediate and long term. A breakout in this ratio would not only suggest further outperformance from MCD, but would also serve as compelling evidence for new highs on an absolute basis.
4/ Cryptocurrencies Test Summer Highs
While Bitcoin and Ether (ETH) have made little to no progress over the past few months, we’re seeing some strength beneath the surface in the crypto market.
The chart below graphs the FTX Altcoin Index, which includes some of the largest tokens other than Bitcoin, such as Cardano (ADA), Solana (SOL), Binance (BNB), and Dogecoin (DOGE), among others.
Unlike Bitcoin, which is still trading roughly 25% below its August highs, the FTX Altcoin Index is testing its August level this week. Altcoins are not only outperforming Bitcoin, but these highly-speculative assets have also been outperforming stocks since the lows of early summer. This relationship is shown in the lower pane.
Seeing a breakout above this key resistance zone could suggest an increase in risk appetite among investors. This is yet another sign that positive animal spirits, or bullish risk appetite, is returning to the market.
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Originally posted 2nd November, 2022
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