By J.C. Parets & All Star Charts
Tuesday, 18th October, 2022
1/ Industrial Stocks Provide Leadership
2/ They Can’t Break the Banks
3/ A Reversal in Risk Appetite?
4/ Betting on Further Inflation
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1/ Industrial Stocks Provide Leadership
After trading in a sideways range on a relative basis since last summer, industrials are making new 52-week highs relative to the overall market. The chart below shows the XLI/SPY ratio completing a bearish-to-bullish reversal pattern, suggesting more outperformance from industrials could be coming our way.
With a successful retest of the breakout level, a rounding bottom formation appears to be complete. As long as the ratio holds above the shelf of year-to-date highs, we could monitor industrials for long opportunities.
2/ They Can’t Break the Banks
Regarding leadership, we’ve been discussing financials lately. We continue to be impressed by the relative strength from the sector, and this is particularly true for the banks.
When we look at the First Trust Community Banks ETF (QABA), there are a handful of bullish characteristics that illustrate the short-term leadership and long-term resilience from these stocks.
Unlike the majority of industry groups, the topping pattern in financials never completed. After a failed breakdown this summer, price has remained above the pivot lows from last year.
Another bullish trait that not many industry groups share right now is the fact that QABA never retested its summer lows. After making a new high in August, price is carving out a higher low. Lastly, the momentum profile of the financial sector is exceptionally strong. While most stocks and indexes have seen a handful of oversold momentum readings recently, QABA has not been oversold in over two years.
3/ A Reversal in Risk Appetite?
One of our favorite ways to measure risk appetite is through the consumer discretionary versus consumer staples ratio.
The ratio is flaunting a positive divergence as it hasn’t made a lower low along with the S&P 500 during the past few weeks. In fact, XLY/XLP bottomed back in May.
Throughout history, this ratio has put in divergences at significant turning points, acting as an excellent leading indicator for the overall market.
This raises the question as to whether the current divergence in XLY/XLP will foreshadow a bottom for the stock market. Of course, the ratio could always catch lower.
At the very least, this is a bullish development suggesting risk appetite is starting to rebound.
4/ Betting on Further Inflation
Rising inflation has been one of the biggest economic trends of the past year. It dominates the news cycle and squeezes our pocketbooks. And while there are signs that inflationary pressures are easing, the market isn’t buying it.
We’ve encountered an interesting divergence between the 10-year breakeven inflation rate and the Inflation Expectations ETF (RINF).
RINF invests in interest rate swaps to track the performance of the FTSE 30-Year TIPS Index.
While both have bounced higher in recent sessions, RINF did not make a fresh low last week. Instead, it made a higher lower before printing fresh three-month highs today.
The question becomes whether breakeven inflation trades will follow higher. If they do, it could breathe fresh life into the commodities market and cyclical value sectors.
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Originally posted 18th October, 2022
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