Chart Advisor: Analyzing Attractive Asset Classes

By Adam Koos, CFP, CMT, CEPA

1/ SPX vs. TLT (Today)

2/ SPX vs. TLT (Covid)

3/ SPX vs. ACWX

4/ SPX vs. DBC

5/ SPX vs. IWM

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1/ SPX vs. TLT (Today)

Let’s recap where we’ve been this week.  Day-1 we discussed the U.S. stock market.  Day-2 we went over a detailed analysis of bonds and interest rates.  Yesterday, we discussed international stocks on a absolute basis. 

Today, we’re going to take a 30,000-foot look at which asset classes and areas of the market are the strongest and most attractive right now.

Before we get started with the charts, I think it’s crucial to understand how to create and read a relative strength chart. 

First off, when you look at the chart below, you’re not looking at the chart of the S&P 500… and you’re not looking at the 20-year Treasury Bond ETF (TLT) either! 

In fact, you’re looking at a relative comparison (strength) chart between the two, so the two most important things you need to remember are: 

1. Whichever investment is “first” (i.e., in the numerator), this is the investment that is stronger if the chart is going up and to the right, and
2. Whichever investment is “second” (i.e., the denominator), this investment is stronger when the chart is falling lower and to the right.

So, now that we understand the basics, when observing the strength between the S&P 500 and the 20-year Treasury ETF (TLT) above, which one is the stronger investment?

Answer:  The S&P 500…

Why?  Because the chart trending up and to the right!

Another filter I like to personal add to any RS (relative strength) chart is a moving average.  Moving averages “smooth out” the choppy, noisy, daily movement that is present in the vast majority of charts. 

So, by adding at 150-day moving average (150 MA), I can see where and when the S&P 500 is above the smoothed-out trendline, as well as times when the trend might be changing, and the RS chart crosses BELOW the moving average.

As you can see, there were SEVERAL times when TLT tried to be the “opposing force” in Newton’s Law, attempting to change the trend in strength (see the red arrows, above), but in the end U.S. stocks have continued to be a force to be reckoned with, when compared to long-dated U.S. Treasuries.

2/ SPX vs. TLT (Covid)

In the chart above, I decided to get in our time machine and go back in time, to the year leading up to the COVID crash, just so you could see how using RS charts can help when it comes to re-allocating your portfolio and managing risk.

2019 was a pretty tough year when looking at strength in stocks vs. bonds.  As you can see, there were three times, that year alone, when bonds took over as the stronger of the two investments.

However, the COVID crash teaches us how powerful an RS chart can be… notice how the trend changed in late-February (with impressive quickness and velocity, I might add), from favoring stocks to instead, favoring bonds. 

Granted, there will always be “whipsaws” when implementing any kind of relative strength or trend-following strategy.  This means that there will be times when the trend changes in one direction, but quickly moves back in the direction of the original trend.  Times like these can be frustrating, they can make you feel stupid…

…but as long as you’re nimble, stick to your rules, and make the needed changes to your portfolio ev
“: |ry time your rules say to do so (and not just some of the time!), you can find yourself in a LOT better shape than if you just “stay the course,” as I’m sure you’ve heard all-too-many times.

It should also go without saying that, when trend changes in an RS chart comparing the S&P500 to 20-year Treasuries, that doesn’t mean you have to sell ALL your stocks and put ALL your money in Bonds either.  It could simply mean you shift the “weighting” of your portfolio, as one example, but there are many ways to build your set of rules – just pick a set of rules that you can stick to!

3/ SPX vs. ACWX

I’ve left the S&P 500 in the numerator (first) position in all of these charts on purpose – to create simplicity.  I’m not trying to confuse (or quiz) anyone here!

This next chart is another comparison of the S&P 500 vs. International stocks held outside the U.S. (specifically, the iShares MSCI All Country World Index ex-US ETF – ACWX). 

It’s been extremely difficult for U.S.-based portfolio managers to “beat the market” this past 14 years, simply because the U.S. has been the best performing index for the vast majority of that time period!  Said another way, if you live in Canada or Australia, you could’ve easily beaten the ASX (Australian Stock Market) or the TSX (Toronto Stock index) by merely buying and overweighting U.S. stocks!

So, as you look at the chart above, you can see there was a brief period of time in late-2020/early-2021 when international stocks came into favor, but it was short-lived. 

Then, you can see how, in late-2022/early-2023, international stocks took over, but this time, in the most convincing fashion we’ve seen since before The Great Recession. 

BUT… this change in trend only lasted six months, and since this summer, while there are still many bright spots within the international markets, staying “at home,” here in the U.S. has continued to be the place to be, that is… if you like making money.

4/ SPX vs. DBC

We’ve looked at the strength in the stock market vs. bonds and international stocks, so now let’s go off the reservation here and take a look at commodities.

Inside the Invesco Commodity Index (DBC) is a basket of precious metals, energy/oil/gas, agricultural and soft commodities. 

As you can see in the chart above, the S&P500 was largely losing the battle against commodities throughout 2021 and most of 2022.  There were a couple (what I call) “head-fakes” (see the red circles, above), where the S&P500 attempted to move the tide, but ultimately failed, weakning further vs. its hard-asset competitor.

It wasn’t until early-2023 when U.S. stocks were able to re-gain a favorable status and with the exception of a couple short whipsaws this summer, the S&P500 has returned as the winner in this battle of investment strength.

5/ SPX vs. IWM

Alright – so we’ve compared the relative strength between stocks, bonds, international stocks and commodities – why not drill down into the U.S. stock market and determine whether large companies are a better investment than small companies?

If you spend any amount of time online, following market technicians and reading their charts, you’ll already know the answer to this question. 

Small-caps have been the biggest problem in the U.S. stock market for well over a year now.  Don’t get me wrong, when large-cap stocks are doing well, there are still plenty of opportunities to make money… but “the market” does better as a whole when “most stocks” are participating in the uptrend. 

What’s been taking place this past couple of years is the opposite – “many stocks” have NOT been participating in the uptrend.  Instead, they’ve been lagging behind their large-cap brethren, and those investments just happen to be small and micro-caps.

So, when you look at the chart above, you can see that small caps were exhibiting higher RS vs. the S&P500 in late-2020/early-2021, but the trend didn’t last long, and U.S. stocks began winning again by summertime. 

If you follow the chart up and to the right, you can also see what I call a “chop fest” at the end of 2022, which continued into early-2023. 

Since then, however, U.S. stocks have continued to retain the upper-hand vs. small-cap stocks, but I think it’ll be interesting to see what happens in early-2024, once tax-loss-harvesting is in the rearview mirror.  It wouldn’t surprise me to see investors and portfolio managers alike, sweep in to take advantage of the clearance sale that currently exists.

Of course, none of that matters if small-caps fail to hold support levels on an absolute basis, but that takes us back to the first article I wrote on Day-1 (just in case you want to go check it out). 😊

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Originally posted 30th November 2023