Chart Advisor: It’s A Dollar Story

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Tuesday, 2nd August, 2022

1/ Risk Appetite Confirms

2/ Stock Market History

3/ It’s A Dollar Story

4/ Energy Stocks Test Resistance

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1/ Risk Appetite Confirms

As we look for confirmation of the recent strength from risk appetite indicators, some of the best information about how investors are positioning themselves could come from the discretionary (XLY) vs. staples (XLP) ratio, shown in black below:

Source: All Star Charts, with data provided by Optuma

The fresh three-month highs in this ratio support the near-term strength we’ve been seeing from stocks lately. We’ve also included the ARK Innovation ETF (ARKK) in the chart in order to illustrate the strong correlation.

In an environment where investors are favoring risk-on stocks over defensive stocks, it might make sense to see growth indexes like ARKK find a floor and start moving higher.

2/ Stock Market History

With July in the books, two of the most critical areas of the market successfully retested key former highs.

As you can see in the chart, financials (XLF) pulled back to the same levels they were before the financial crisis. Home construction (ITB) did the same thing, finding support at its subprime crisis highs.

Source: All Star Charts, with data provided by Optuma

It would be hard to overstate the importance of these former highs. These groups are not only an excellent gauge for global growth and risk appetite, but they are the sector culprits from the financial crisis.

With so much price memory at current levels, it is no surprise to see buyers step in here. The next key piece of information could come from how prices react at these former highs.

If they cannot hold these levels and get stuck below the 2007 highs, the structural trend for these economically sensitive groups could be broken and would not bode well for the broader market and risk assets in general.

3/ It’s A Dollar Story

Whichever way you slice it, it all comes down to the dollar. It doesn’t matter whether we’re looking at the U.S. Dollar Index (DXY) or emerging market currencies. It’s a dollar story, and it impacts risk assets.

The overlay chart of the Emerging Market Currency ETF (CEW) and the S&P 500 Index (SPX) highlights critical former lows. In the spring of 2016 and 2020, both these indexes bottomed around the same time before experiencing significant uptrends.

Source: All Star Charts, with data provided by Optuma

Now that emerging market currencies are back, will we see similar action as we have in the past? If CEW is breaking below that crucial shelf of former lows, then stocks could make new lows as well.

4/ Energy Stocks Test Resistance

Energy stocks are in everyone’s sights after rallying 10% last week and retesting former highs from below. We are watching closely to see how prices react at this critical level of resistance

Source: All Star Charts, with data provided by Optuma

The last time we were here, XLE put in a failed breakout and corrected roughly 30%. If and when we get above the 80 level, the risk could be to the upside, and we could expect a fresh leg higher from these former leaders. However, as long as we’re below this shelf of old highs, we might expect more corrective action.

Originally posted 2nd August, 2022

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