By J.C. Parets & All Star Charts
Friday, 6th January, 2023
1/ International Leaders Break Higher
2/ Financials Flirt With Fresh Highs
3/ Rates Retreat
4/ Will Commodities Crack?
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1/ International Leaders Break Higher
Improvement from international equities continues as the strongest countries and global indexes are printing fresh new highs and breaking out from short-term continuation patterns.
The iShares MSCI Italy ETF (EWI), which closed at its highest level in 11 months today, provides an excellent example of the type of price action we’re seeing outside the U.S.
Seeing more countries trending to the upside and making higher highs indicates broadening participation abroad. These bullish market internals are supportive of a bottom and a new uptrend for international equities as a whole.
We’re on the lookout for overbought momentum readings next week as confirmation of the new highs we’re seeing from Italy and other international indexes.
2/ Financials Flirt With Fresh Highs
Financials led the market during the middle phase of the rally in late 2020 and early 2021. However, the relative trend for financials has now been sideways for most of the past two years.
This prolonged sideways trading range can be seen on the right-hand side of the ratio chart between the Financial Sector SPDR (XLF) and S&P 500 (SPY), below.
When we analyze the most recent price action, this ratio appears poised to resolve higher. Notice how financials have been pressing on the upper bounds of this rectangle formation for the past several months.
The more times a level is tested, the more likely it is to break. As such, XLF/SPY could break this resistance level soon. We could anticipate fresh multi-year highs and an overbought momentum reading to confirm them in the coming days and weeks. If and when it happens, financial stocks could enjoy a period of sustained leadership.
3/ Rates Retreat
Benchmark yields in Germany, France, Spain, and Portugal hit fresh multi-year highs last week. However, the 10-year Treasury yield in the U.S. did not, and neither did the two-, five-, and 30-year yields.
This lack of confirmation from U.S. yields is intriguing, particularly as European yields turn lower this week. Below is a triple-pane chart of German, French, and Spanish 10-year yields:
All three benchmarks broke above their respective October highs, finishing 2022 on a high note. However, the breakouts were short-lived as yields slid lower this week.
The lackluster moves suggest potential failed breakouts. These failed moves could turn out to be nothing more than false starts. Nevertheless, risk could be to the downside below last year’s high.
For the past year and a half, we have looked to developed market yields outside the U.S. for insight into the direction of domestic interest rates. It has proven invaluable on multiple occasions. This time might not be any different.
4/ Will Commodities Crack?
The Bloomberg Commodity Index (BCOM) is breaking down, approaching fresh 52-week lows. The recent breakdown in commodity prices excludes gold and copper, as they print fresh six-month highs.
When we review other major commodity indexes, including our own equal-weight index comprised of 33 individual contracts, all look poised to roll over. Below is a triple-pane chart of the Bloomberg, CRB, and our equal-weight commodity indexes:
Notice the differences between these indexes, which we’ve included on the left side of the charts. The weighting structures vary, as do their support levels. For instance, the CRB index and our equal-weight commodity index are challenging their 2022 lows while BCOM has undercut its respective lows.
Remember, the commodity market is a market of commodities, just as the stock market is a market of stocks. We can’t allow these topping formations to overshadow pockets of strength within the commodity space such as precious metals and agriculture.
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Originally posted 6th January 2023
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