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

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