Chart Advisor: A Tale of Two Markets

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Friday, 24th March, 2023

1/ Tech Up, Banks Down

2/ Big Banks Break Down

3/ New Lows for Small Stocks

4/ Yields Drag Commodity Indexes Down

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ Tech Up, Banks Down

2023 has been a tale of two markets so far as growth stocks have gained while financials and other cyclical stocks falter.

Considering the growing performance gap between the best and worst-performing sectors, we could expect some mean reversion in the near future. The chart below shows the year-to-date performance of the large-cap technology sector SPDR (XLK) and the SPDR Bank ETF (KBE):

Source: All Star Charts, with data provided by Koyfin

As you can see in the chart above, the dispersion in returns between these respective leaders and laggards is approaching 40 percentage points. This is a massive divergence considering less than three months of price action.

Tech and growth stocks are unlikely to keep rising indefinitely in an environment where financials are collapsing. Financials are as important of a sector to the broader market as any other, and bulls want to see these stocks participate. If they don’t soon, the odds of tech stocks reversing lower may only increase.

2/ Big Banks Break Down

More banks are getting hit by selling pressure as the days go by.

Not only are regional banks collapsing, but money center banks are also breaking down to multi-year lows following the completion of massive tops.

Source: All Star Charts, with data provided by Optuma

Shares of Wells Fargo (WFC) and Bank of America (BAC), two of the largest and most important banks in the U.S., are hitting new multi-year lows.

As long as these stocks remain under pressure, so could the broader financial sector.

3/ New Lows for Small Stocks

Large-cap stocks have shown impressive relative strength in the last few weeks as technology and growth stocks reassert their old leadership.

The chart below shows the Russell 2000 ETF (IWM) on the verge of breaking down relative to the S&P 500 (SPY):

Source: All Star Charts, with data provided by Optuma

As you can see, prices are pressing against a critical support level at the shelf of former lows from 2022.

If we see a decisive break in this relationship, we could expect further outperformance from large caps. However, if small caps are to catch a relative bid, it could occur at this level.

4/ Yields Drag Commodity Indexes Down

Yields are no longer rising, and it’s taking a toll on commodities.

Below is a triple-pane chart of the Bloomberg Commodity Index (BCOM), the CRB Index, and our equal-weight index comprised of 33 individual contracts:

Source: All Star Charts, with data provided by Optuma

The EW 33 remains resilient despite the BCOM and energy-heavy CRB Index recently posting fresh 52-week lows. Its buoyancy speaks to lingering strength in various contracts such as orange juice, cocoa, sugar, live cattle, precious metals, copper, and steel.

But the environment could be changing as yields begin to turn lower.

As long as that remains true, pro-cyclical commodities such as energy and industrial metals could struggle, while precious metals—especially gold and silver—could benefit.

Originally posted 24th March, 2023

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