By J.C. Parets & All Star Charts
Friday, 7th October, 2022
1/ Building Up Energy
2/ Higher Lows for High Yield
3/ Will the Averages Confirm the Trend?
4/ Positioning Over Sentiment
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/ Building Up Energy
Few assets were spared from today’s selloff, as even energy stocks turned lower into the close. Despite the broad selloff, energy booked its best week since November 2020. Perhaps unsurprisingly, this is when the rally in energy kicked off nearly two years ago.
Short-term momentum thrusts like these tend to occur at the early stages of a new uptrend. After trading sideways and digesting gains since the early summer, the recent price action suggests energy stocks could be in for a fresh leg higher. As long as XLE is above 78, the risk could be to the upside.
2/ Higher Lows for High Yield
We’re seeing plenty of bullish divergences as we scroll through our charts.
One that has caught our attention is the higher low in the ratio of the High Yield Corporate Bond ETF (HYG) and the iShares Treasury Bond ETF (IEI), as the S&P 500 printed fresh lows.
The bullish divergence from this critical risk ratio was a poignant sign that investors are still reaching for risk. Stocks confirmed this price action by rallying to kick off the week.
It also suggests the U.S. bond market is not under stress as it relates to credit spreads. We’ll continue to monitor high yield bonds and the HYG/IEI ratio for signs of deterioration. If stocks continue to move lower next week, we’ll be watching this ratio for confirmation.
3/ Will the Averages Confirm the Trend?
One of our favorite tenets of the Dow Theory is the concept of confirmation, or the idea that the indexes should confirm each other.
The chart below shows the Dow Jones Industrial Average (DJIA), Dow Jones Transportation Average (DJTA), and the PHLX Semiconductor Index (SOX), all printing new lows in tandem last week.
These indexes are an excellent gauge of overall market health and can offer valuable information regarding the near-term trajectory of stocks. While transports were the lifeblood of the economy in the past, semiconductors have taken over that role in recent decades. For this reason, we like to consider both indexes.
Based on the weight of the evidence, this could be strong confirmation for the primary downtrend in stocks. If the selling pressure persists into next week, we’ll be examining all three of these charts for new lows.
4/ Positioning Over Sentiment
Consumer sentiment has been pessimistic for the better part of a year. Despite this, we have yet to see the major indexes confirm any of the extreme readings despite the ongoing selloff in stocks.
One of the most interesting things about current sentiment data is the dislocation with positioning. The chart below illustrates this:
The University of Michigan’s Consumer Sentiment Index (MCSI) notched a new all-time low in June, with consumer pessimism exceeding that of the 2008 Financial Crisis. However, exposure to equities is still in a range that is more prevalent during bull markets, rather than bear markets.
Until we see investors capitulate with their actions in the market, rather than just their words, it could be difficult to confirm that the bottom is in.
—
Originally posted 7th October, 2022
Disclosure: Investopedia
Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.
Disclosure: Interactive Brokers
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Investopedia and is being posted with its permission. The views expressed in this material are solely those of the author and/or Investopedia and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: ETFs
Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
