Chart Advisor: Banks vs. Big Tech

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Wednesday, 10th May, 2023

1/ Banks vs. Big Tech

2/ Mixed Signals From Healthcare

3/ Teetering Tops

4/ A Relative Breakout for Precious Metals

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/ Banks vs. Big Tech

The Technology Sector SPDR (XLK) made new 52-week highs, and the Nasdaq 100 (QQQ) hit its highest level since August today. Betting against the uptrend in big tech has caused losses for bears in recent months.

There is a growing list of bullish developments for the overall market, as participation is expanding beyond technology to more and more risk-on industry groups. While this is true, we are still paying close attention to the banks, as the drastic divergence in performance between these laggards and the rest of the market may not prove to be sustainable.

The performance chart below tells this story well, as the Nasdaq 100 is up over 10% since March despite the Regional Banking ETF (KRE) falling by almost 40% over the same time.

Source: All Star Charts, with data provided by Optuma

The gap in performance between these two major indexes is almost 50% in just a little over two months. Since we do not want to assume that these two groups will move in opposite directions over the long run, the question becomes “who is right here?”

If the Nasdaq turns out to be right, we should see a major catch-up move from banks soon. However, if banks are telling the right story, the Nasdaq and broader market should come under pressure and move in line with KRE.

For now, there is no evidence that either is about to happen any time soon, as banks are trading around multi-year lows while tech and growth stocks keep pressing to fresh highs.

2/ Mixed Signals From Healthcare

In sideways markets, there are groups that suggest they could be positioned for gains as well as others that indicate risk to the downside.

An excellent example of this is the comparison between the iShares US Medical Devices ETF (IHI) and the iShares US Healthcare Providers ETF (IHF):

Source: All Star Charts, with data provided by Optuma

As you can see, IHI has built a constructive base for almost a year. Currently, price is resolving to the upside to new multi-months highs. This chart pattern looks quite similar to a lot of the bases we’re seeing in growth indexes these days.

On the flip side, IHF has been simultaneously carving out a topping formation. Although it has not broken down yet, it looks more like a distributive pattern than accumulation.

We always maintain a more positive view on leadership groups compared with laggards.

3/ Teetering Tops

Evaluating relative trends is a valuable process that helps us anticipate what the price of an asset is likely to do on absolute terms.

When we analyze the major oil and gas operator Occidental Petroleum (OXY), we see price carving out topping formations relative to the S&P 500 (upper pane) and the energy sector (lower pane):

Source: All Star Charts, with data provided by Optuma

If these topping patterns finally resolve lower, it would support a downside resolution on absolute terms. This would be a bearish development for OXY and energy stocks in general.

The absolute price chart for OXY looks quite similar to the distribution patterns in the ratios above. It is possible that all three could resolve in the same direction around the same time.

4/ A Relative Breakout for Precious Metals

Gold futures haven’t broken out yet. But that hasn’t stopped the precious metal from shining.

It came within five dollars of new all-time highs last week. Meanwhile, gold mining stocks (GDX) are outperforming the S&P 500 (SPY). And our precious metals index is breaking out of a bearish-to-bullish reversal versus our broad equal-weight commodity index.

Source: All Star Charts, with data provided by Optuma

Relative strength accompanies the strongest trends and sometimes leads major upside resolutions.

If precious metals and their related stocks continue to outperform their alternatives, it could simply be a matter of time before gold futures post a new all-time high and resolve from this multi-year range.

Originally posted 10th May 2023

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