Chart Advisor: Bonds and Big Tech Diverge

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Tuesday, 18th April, 2023

1/ Polarity in Practice

2/ Bonds and Big Tech Diverge

3/ International Stocks Surge

4/ All That Glitters

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/ Polarity in Practice

We’ve written extensively about the importance of prior-cycle highs in major U.S. indices and sectors.

Plenty of critical levels come into play when we look at our charts. This is especially true for the Russell 2000 ETF (IWM) and the Financial Sector ETF (XLF):

Source: All Star Charts, with data provided by Optuma

As you can see, these two charts are closely correlated. Prices bounced off a shelf of former resistance at the current level for the third time as buyers successfully defended the 2018 and 2020 highs.

If these index funds are above their former highs, then the structural trends likely remain intact. However, a violation of these levels could warrant a more cautious outlook toward the broader market and risk assets in general.

2/ Bonds and Big Tech Diverge

With yields powering higher over the past few weeks again, we’re closely monitoring long-duration assets such as bonds and tech stocks.

The overlay chart below does an excellent job of illustrating the relationship between these two assets. Like bonds, tech stocks are impacted by movements in interest rates. As yields climbed last year, tech stocks and Treasury bonds followed a similar path lower.

Here is a look at the Large Cap Technology Sector SPDR (XLK) overlaid with the iShares 20+ Year Treasury Bond ETF (TLT):

Source: All Star Charts, with data provided by Optuma

Since bottoming last fall, the positive correlation between Treasurys and tech stocks appears to have weakened. While XLK has made a series of higher highs and higher lows since December, TLT has made a series of slightly lower highs and lower lows.

This divergence is unlikely to continue over the long run. Either tech stocks will catch lower to Treasury bonds, or Treasurys will catch higher to match the strength in tech stocks. Historically, however, the bond market tends to be more reliable in setting trends.

3/ International Stocks Surge

International equities have been on an upswing since they bottomed in October of last year, leading the way higher on both absolute and relative terms.

This is particularly true for the MSCI EAFE ETF (EFA), which has rallied roughly 35% in a near-vertical line off its 2022 lows, setting new 52-week highs recently:

Source: All Star Charts, with data provided by Optuma

This ETF is one of the best proxies for tracking developed market equities. Some of its biggest country weights are Japan, the United Kingdom, and France, which account for almost half of the index.

The fact that EFA is reaching new highs suggests broadening participation from some of the largest developed economies, which could support the next leg higher for global equities.

4/ All That Glitters

Gold is on the verge of breaking out of a historic base. 

But considering the lack of progress gold has made since its prior-cycle peak back in 2011, it makes more sense to look at gold’s performance priced in various currencies:

Source: All Star Charts, with data provided by Optuma

Substituting the U.S. dollar with the pound, euroyen, or Australian and Canadian dollar yields far more impressive outperformance from gold.

The weight of the evidence suggests it could only be a matter of time before gold starts rallying priced in U.S. dollars.

Originally posted 18th April 2023

Join the Discussion

Thank you for engaging with IBKR Campus. If you have a general question, it may already be covered in our FAQs. If you have an account-specific question or concern, please reach out to Client Services.

Your email address will not be published. Required fields are marked *

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.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.