Chart Advisor: Turnaround Tuesday

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Tuesday, 31st January, 2023

1/ All Green on the Screen

2/ Record Profits for Big Oil

3/ Bulls Bid Up Steel

4/ Financials Take the Lead Overseas

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1/ All Green on the Screen

We write about daily action in this newsletter often, but it’s important to remember that one day’s events do not make a trend. Trends can take weeks, months, or even quarters to be established. 

In fact, we’ve seen a lot of new trends emerge over the trailing quarter or more. This is no coincidence as the U.S. dollar peaked and became a tailwind for risk assets about four months ago. 

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Source: All Star Charts, with data provided by Koyfin

Here is the performance of some of the major asset classes since the U.S. Dollar Index reached its high in late September. 

International stocks have rallied roughly 26% after bottoming in early October. The S&P 500 also booked a modest gain in this time. Even bonds have had positive performance, which isn’t something we’ve been able to write for a long time. The Treasury Bond ETF (TLT) rallied about 16% since bottoming in late October. Even Bitcoin, which bottomed long after most risk assets, is up almost 20% since the dollar bottomed, and a whopping 50% off its November lows.

The bottom line is that a falling dollar has put a strong bid in more than just stocks since last fall. A new bull market could be underway for most risk assets.

2/ Record Profits for Big Oil

In yesterday’s note, we discussed the inability of the Large Cap Energy Sector SPDR (XLE) to reclaim its pivot highs for the second time since November.

Due to the top-heavy composition of XLE, we can look at a handful of major weightings to determine where it is likely headed from here.

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Source: All Star Charts, with data provided by Optuma

At over 23% of the index, no component is more critical to XLE than the largest energy company in the U.S., Exxon Mobil (XOM). Today, Exxon reported a record profit in 2022, booking its largest annual earnings figure ever at $55.7 billion. 

As you can see in the chart, this earnings release is coming at a crucial time and place for the structural trend. With price churning just above its former all-time highs from 2014, XOM was vulnerable to a negative earnings reaction that could have resulted in price undercutting this key level. 

Instead, the opposite occurred as the latest performance from the company sent the stock higher by more than 2%. XOM could make fresh all-time highs in the coming days, and it may only be a matter of time until the broader energy sector follows.

3/ Bulls Bid Up Steel

Metals and mining stocks have been among the best-performing groups in the last few months.

Whether we’re talking about industrial or precious metals, they are all reaching multi-month highs as risk appetite increases across the most cyclical areas.

Here’s the VanEck Vectors Steel ETF (SLX) pressing against the upper bounds of a multi-year base after spending roughly two years consolidating within an ongoing uptrend.

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Source: All Star Charts, with data provided by Optuma

This critical resistance level also represents the 2021 highs and a false start from April of last year, making it our line in the sand.

If SLX can reclaim this critical level of interest around 68, the path of least resistance could be higher, and it would also be a major feather in the hat for cyclical stocks and commodities.

4/ Financials Take the Lead Overseas

The European Financials ETF (EUFN) can provide excellent information about the risk-seeking behavior of global investors. Not only do we like to evaluate it on an absolute basis, but on a relative basis, it can also give us valuable clues.

As you can see, EUFN is on the verge of breaking out from a multi-year reversal pattern relative to European equities (VGK).

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Source: All Star Charts, with data provided by Optuma

Seeing this ratio make a valid upside resolution would be consistent with the early stages of a new bull market. With prices pressing on the upper bounds of a rounding bottom reversal, that could be where we’re headed.

Originally posted 31st January 2023

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