By J.C. Parets & All Star Charts
Thursday, 8th September, 2022
1/ Health Care Rebounds
2/ Stocks Hold the Line
3/ Rates and Stocks Diverge
4/ Gold Still Has Value
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1/ Health Care Rebounds
Health care stocks led a broad rally today as the major averages appear to have found a floor following the August selloff. We discussed the potential top in the Large Cap Health Care Sector SPDR (XLV) last week. For now, buyers are still defending the lower bounds.
When we move down the cap scale and look at small cap health care stocks (PSCH), there is a lot more weakness. Notice how a top was completed late last year. This was actually one of the first sector indexes to break down during the current cycle.
Small cap health care is currently trapped beneath overhead supply at the 2018 highs. This level acted as support, albeit briefly, during the first quarter. We’ll find out soon whether it will turn into resistance or not.
2/ Stocks Hold the Line
Markets have experienced a high degree of turmoil in the last year and a half. As a result, sellers have remained in full control, and many indexes and sectors find themselves below overhead supply.
However, when we zoom out and put things into context, we can see that some structural support levels are still intact.
As you can see in the chart, the Value Line Geometric Index is currently holding above a polarity zone that coincides with former highs from two decades ago, making it a critical level of interest. This index represents the median stock performance and is an excellent way to view how the overall market is doing.
If VLG can find real support here, markets are not falling apart. On the flip side, if the median stock can’t hold these levels, the structural trend for equities would be broken, and we could expect further selling pressure for stocks and risk assets.
3/ Rates and Stocks Diverge
U.S. yields and the small-cap value/small-cap growth ratio tend to go hand in hand. The chart below illustrates how closely these two have moved together during the last twelve months.
As rates have risen, cyclical and value sectors have enjoyed steady leadership. This ratio is a great gauge to support or contradict what we see in the bond market.
More recently, it’s showing a divergence as yields press higher, and the value/growth ratio has not been able to follow and confirm the price action. If this is a sustainable rally in rates, we would expect value stocks to pick it up and start outperforming.
4/ Gold Still Has Value
U.S. Treasury yields and breakeven inflation rates continue to creep higher. While gold has not been the best inflation hedge during the past couple of years, it does have a tendency to signal the prospect of inflation. It was the first commodity to start rallying in 2019. That was a full year ahead of the rest of the commodity space.
Fast forward to today, and gold is on the verge of breaking down from a two-year consolidation. If gold breaks down to fresh multi-year lows, it would be an indication of easing inflationary pressures on the horizon.
That would throw a wrench in the commodity bull run and could dampen the rotation into cyclical areas of the market.
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Originally posted 8th September, 2022
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