By J.C. Parets & All Star Charts
Monday, 3rd April, 2023
1/ Fueling Up
2/ Sector Rotation
3/ Embarking on a Bullish Month
4/ Europe Resolves Higher
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1/ Fueling Up
Energy stocks have rallied more than 10% in just over a week. In the middle of March, we were discussing the damage to the structural trends in the energy sector and watching the 2018 highs for signs of further downside.
These stocks have reversed course over the past week, shifting from short-term laggards to leaders. With bulls coming out to defend the 2018 highs in crude oil near $75 per barrel, we want to shift our focus to shorter timeframes to analyze the tactical trends:
When we draw Fibonacci retracement lines based on the second half of the 2022 rally, we obtain logical levels that coincide with pivot lows.
After falling roughly 20%, the energy sector ETF (XLE) appears to have found support at its 61.8% retracement last month. Coming into the new week, we’re seeing bullish follow-through as price gapped higher by 4.5% today, taking out a shelf of recent lows at the 38.2% retracement.
This recent strength from energy stocks is just the latest example of the constructive sector rotation that has been taking place since late last year.
2/ Sector Rotation
Sector rotation is the lifeblood of a bull market.
The bubble chart below shows each large-cap sector fund’s 2022 performance on the y-axis and the quarter-to-date return on the x-axis:
As you can see, technology (XLK), communications (XLC), and consumer discretionary stocks (XLY) have recorded a solid gain over the past quarter. However, when we look at the returns of the value-oriented and defensive sectors, they have performed slightly lower to unchanged during this time.
This tells us that the stocks that were laggards last year are now the leaders in 2023.
3/ Embarking on a Bullish Month
From a seasonality perspective, we are now entering one of the best months of the year for the stock market.
Based on historical seasonal trends since 1950, April has been the second-best month of the year for equities, averaging a 1.53% return for the S&P 500. It also ranks fourth best over the trailing decade and 5-year period.
This tells us that seasonality remains a tailwind for equities. We could expect April to be a strong month for stocks, adding to the bullish developments of the trailing two quarters. However, if the bulls do not appear, it could be a warning sign of further turmoil or a return to the volatility that plagued much of March.
4/ Europe Resolves Higher
Throughout the past six months, European equities have outperformed their U.S. counterparts.
The Euro Stoxx 50 ETF (FEZ) has risen almost 50% from its lows, reaching new 52-week highs last week:
As you can see in the above chart, price has not only rallied in a near-vertical line since October, but buyers have taken control and reclaimed a shelf of former lows from 2021. If this breakout sticks, the bias could remain higher for European stocks.
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Originally posted 3rd April 2023, 2023
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