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By J.C. Parets & All Star Charts
Monday, 21st November, 2022
1/ Logical Levels for Leaders
2/ SPACs Over SPX
3/ Let the Dollar Dance
4/ Copper Continues to Coil
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1/ Logical Levels for Leaders
After a strong rally off the October lows, many U.S. sectors and indexes are running into logical levels of overhead supply.
This is particularly true for the large-cap Industrial Sector SPDR (XLI), which recently recovered its 161.8% Fibonacci extension for the second time this year.
This level coincides with a shelf of former lows from last year and the pivot highs from this summer, making it a logical level for the current rally to pause.
However, if industrials can reclaim this critical level and close the week higher, it could be a very constructive signal for the broader market.
2/ SPACs Over SPX
Special purpose acquisition companies, or SPACs, are exactly what their name suggests. These firms function as holding companies with the sole purpose of acquiring other companies and bringing them public through reverse mergers.
However, not all SPACs find targets. If they are unsuccessful, they eventually disband and delist from the public marketplace. The performance chart below shows a custom index of SPACs that never made acquisitions, alongside a chart of the S&P 500.
Despite all the negative attention around SPACs in recent years, our custom index has steadily outperformed the broader market over the trailing 12 months.
The fundamental reason for this leadership is simple. SPACs are simply holding companies with nothing but cash on their balance sheet. Instead of focusing on the outperformance from SPACs, the above chart illustrates how rough of an environment it has been for index investors this year. Even some of the most speculative investments have outperformed the broader market recently.
3/ Let the Dollar Dance
The U.S. Dollar Index (DXY) has found its footing after experiencing significant downside momentum in recent weeks. This was largely due to a rebound in its top index weighting, the euro.
The EUR/USD weekly chart below highlights a critical level of former support turning into resistance.
It’s no coincidence that the bulls are running into supply at a shelf of former lows. This is the principle of polarity in action, and we could expect a period of consolidation below the newfound resistance level.
After a series of explosive moves within the forex (FX) markets last week, EUR/USD could be due for a pullback.
4/ Copper Continues to Coil
The recent strength from both industrial and precious metals has been welcomed by stock market bulls. No other commodity signals a risk-on environment quite like copper.
After hitting fresh highs earlier this month, copper futures have fallen back within their prior range on absolute terms and relative to gold.
Besides revealing a lingering risk aversion among investors, recent movements in copper futures remind us that bottoms are a process, not an event. The fact that copper continues to coil suggests demand needs to digest an overwhelming amount of overhead supply.
We could expect choppy conditions to persist over the coming weeks and months as the bulls accumulate their position.
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Originally posted 21st November, 2022
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