By J.C. Parets & All Star Charts
Thursday, 8th November, 2022
1/ Supply Looms Above
2/ A Relative Reversal
3/ France Reclaims Former High
4/ Bonds Bust a Move
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1/ Supply Looms Above
The S&P 500 snapped a five-day losing streak today. In considering where it could go next, we can’t underestimate the confluence of overhead supply looming above.
The chart below shows the SPDR S&P 500 ETF (SPY), with the most recent advance halting at a logical level of resistance.
The 200-day moving average (MA), the anchored VWAP from all-time highs, and a downward-sloping trendline all converge at the same area near 400. After a few days of selling, we’re looking for bulls to make another attempt at this key level. As long as we remain below this critical resistance zone, the present downtrend could remain firmly in place.
2/ A Relative Reversal
No matter which asset class you’re looking at, whether on an absolute or relative basis, the markets are messy right now.
Zooming out, the near-term chaos makes more sense. Here is the overlay chart of the 10-year Treasury yield (TNX) graphed alongside the value vs. growth ratio:
These two charts have followed the same path for the past two years, as rising yields tend to benefit cyclical value sectors while simultaneously punishing growth stocks.
But in 2022, traditional correlations have been tested as many intermarket relationships have decoupled.
If and when these charts resolve in the same direction, it could indicate that the next directional trend is underway. Until then, markets could remain messy.
3/ France Reclaims Former High
With the major U.S. averages running into logical levels of supply, international equities are becoming increasingly attractive.
One index that stands out is the iShares MSCI France ETF (EWQ), which is reclaiming its prior-cycle highs this week.
This level not only represents where global risk peaked in 2018, it also coincides with the pre-pandemic highs and the summer highs from this year. Furthermore, momentum is hitting overbought levels, confirming the new highs.
Although the 200-day moving average is sloping downward, the trend is slowly shifting in favor of the bulls. This is one more piece of evidence that could favor global equities.
4/ Bonds Bust a Move
The long-duration Treasury Bond ETF (TLT) has risen almost 20% since late October. In the process, it registered its largest four-week rate of change in a decade, excluding the onset of the COVID-19 pandemic.
Although TLT’s performance is an outlier, as shown in the bubble chart below, the bond market at large is registering positive one-month trailing returns.
This is a significant development for an asset class that is experiencing its worst year on record. Though the chart displays near-term strength, with the one-week percentage change on the x-axis and the corresponding one-month performance on the y-axis, it could mark the start of an uptrend.
On the other hand, the lackluster one-week rolling returns for TIPS and high-yield bonds raise concerns. Stock market bulls do not want to see the current divergence between high-yield bonds and Treasurys widen, which is an indicator of rising credit market stress. Stocks tend to struggle under these circumstances.
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Originally posted 8th December 2022
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