Chart Advisor: Growth Gets in Gear

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Friday, 21st April, 2023

1/ Growth Gets in Gear

2/ Financials Test Former Support

3/ Keep Your Eyes on Wheat

4/ DXY Finds Its Feet

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/ Growth Gets in Gear

We’re almost a month into the second quarter of the year, and it is safe to say that 2023 has ushered in a new group of leaders. We’ll have to see if this remains the case over longer timeframes, but over the short and intermediate term, it’s been all about growth stocks.

The bubble chart below shows the year-to-date return for a selection of industry group ETFs on the x-axis, with the maximum drawdown from the 2021 or early 2022 peak on the y-axis:

Source: All Star Charts, with data provided by Optuma

There is a very clear theme here, with growth areas clustered in the lower right quadrant of the chart while cyclical groups are on the left side.

Despite the massive drawdowns from growth sectors of the market last year, these sectors are now outperforming. Meanwhile, the cyclical groups that performed comparatively well during last year’s bear market are now underperforming. In fact, each of the value ETFs is lower on an absolute basis so far this year.

2/ Financials Test Former Support

The financial sector has been in the eye of the storm for over a month now as the outlook for banks remains uncertain.

Here is a look at the Invesco Equal Weight Financials ETF (RYF) challenging a critical level of former support:

Source: All Star Charts, with data provided by Optuma

This key level for RYF represents a shelf of former lows from last year and a logical place for sellers to enter the market, turning previous support into resistance.

Momentum as measured by the 14-day RSI has been in a bearish regime for some time now, indicating that sellers are still in control.

As long as RYF remains below this level of overhead supply, the risk could be to the downside, and we may expect volatility to increase. However, if price reclaims this level, it would be a strong indicator in favor of the bulls.

3/ Keep Your Eyes on Wheat

Grain markets are facing increased selling pressure, with corn, wheat, and soybean futures edging toward their respective year-to-date lows as demand wanes. 

Fresh multi-month lows in these agricultural contracts carry broader implications for equities and cyclical assets, particularly crude oil.

Here is the price of crude oil overlaid with Chicago wheat futures:

Source: All Star Charts, with data provided by Optuma

These two markets have a strong positive correlation, tending to peak and trough together at major turning points. Both peaked in the first half of last year, and have trended lower since. 

A fresh leg lower for wheat could imply the same for crude. It doesn’t mean crude is guaranteed to follow, but that’s historically been the case.

We could expect cyclical assets, including commodities, their related stocks, and value-oriented sectors to catch lower. The catalyst could be a downside resolution in wheat futures.

4/ DXY Finds Its Feet

A weaker dollar is a key ingredient for a risk-on rally. Yet, like yields, the buck refuses to roll over.

To provide a broader scope of the underlying trend, here is a triple-pane chart of the U.S. Dollar Index (DXY), the G-10 Currency Index, and the U.S. dollar advance-decline (A/D) line:

Source: All Star Charts, with data provided by Optuma

Unlike DXY, both charts are holding well above their lows from earlier this year. This reveals a lack of broader U.S. dollar weakness, suggesting more sideways movement for the dollar could be on the horizon.

As long as the dollar remains buoyant, a big surge in stock prices is unlikely. But if and when DXY rolls over, we could expect a short-lived dollar decline as long as the G-10 Index and the advance-decline line hold above their year-to-date lows.

Originally posted 21st April 2023

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