Chart Advisor: Banks Bounce Back

By J.C. Parets & All Star Charts

Wednesday, 7th June, 2023

1/ Banks Bounce Back

2/ A Logical Level for New Leadership

3/ Vietnam Builds a Base

4/ Investors Prefer Emerging Market Bonds

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1/ Banks Bounce Back

After slicing to its lowest level since September 2020, the Regional Banks ETF (KRE) quickly recovered and has rallied roughly 9% in the past two days.

Not only are these stocks an excellent indicator to measure risk appetite, but banks represent the most significant industry weighting in small-cap equity indexes.

As you can see, KRE is reclaiming a critical level of former support at the $41.30 level. Additionally, momentum is accelerating higher, reaching its highest level in four months.

As long as this economically sensitive group remains above this support level, it is likely that a tradable low is in. This is also a positive sign for the overall market, as it supports the sector rotation taking place since last week.

2/ A Logical Level for New Leadership

We’ve been alerting investors to what looks like the early stages of a significant rotation out of big-cap tech and into small-cap stocks.

One way to visualize this theme is through the ratio between the iShares Core S&P Small-Cap ETF (IJR) and Large-Cap Technology Sector ETF (XLK):

The ratio violated a critical support level and reached multi-year lows last week. However, buyers immediately stepped in and are trying to reclaim this former support at the 2020 low. This potential failed breakdown could result in a fast move in the opposite direction over the coming weeks.

There’s also a bullish momentum divergence in place as the 14-day relative strength index (RSI) made a higher low despite the lower lows in price.

If IJR/XLK reclaims 0.60, it will be a major data point that supports a healthy rotation into the smaller names and value-oriented areas of the market.

3/ Vietnam Builds a Base

It’s difficult to maintain a bearish outlook for global equities when the riskiest areas of the world are breaking out. We’re talking about emerging and frontier markets.

The Vietnam ETF (VNM) provides an excellent example of this theme:

VNM is printing fresh eight-month highs as it completes a bearish-to-bullish reversal. It’s also registering the highest 14-day relative strength index (RSI) reading since 2020, indicating that the bulls are in control and confirming today’s breakout.

Seeing a frontier market country like Vietnam post a major pattern reversal underlines global risk appetite—the type of behavior befitting a bull market.

We imagine that, if VNM holds its breakout, other U.S. and international equity indexes could follow as stock market bears continue to lose ground.

4/ Investors Prefer Emerging Market Bonds

International credit spreads are contracting.

If investors prefer emerging market bonds over risk-free U.S. Treasuries, global equity markets must be healthy. That includes the S&P 500 and domestic equities.

Check out the Emerging Bond ETF (EMB) vs. the U.S. Treasuries ETF (IEF) ratio overlaid with the S&P 500 ETF (SPY):

We use the EMB/IEF ratio to measure international credit spreads. The outperformance of EMB since early April highlights a risk-seeking behavior associated with bull markets. So it isn’t surprising SPY is challenging its August 2022 highs. 

We could witness those former highs falling to the wayside if participation broadens into small caps and value-oriented stocks. It appears that international equities are leaning in that direction—up and to the left. And so are emerging market bonds.

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Originally posted 7th June 2023