Chart Advisor: Powell Plunge

Articles From: Investopedia
Website: Investopedia

By J.C. Parets & All Star Charts

Tuesday, 7th March, 2023

1/ European Banks Look Different

2/ Rising Rates and Dollar Strength Persist

3/ Animal Spirits Are Back

4/ Zooming Out on Crypto

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/ European Banks Look Different

As the spread between long-term and short-term yields turns increasingly negative in more countries around the world, it’s not surprising that bank stocks are struggling. Banks generate profits based on their net interest margins, or the spread between the interest rates at which they lend money versus the rates they offer on deposits. 

However, not all bank stocks are equal in today’s market. When we look at our custom European bank index, a few positive trends stand out:

Source: All Star Charts, with data provided by Optuma

The chart above shows the relative performance of U.S., Canadian, and European banks relative to the S&P 500. While U.S. and Canadian banks are trading near multi-year lows in large distribution patterns against the S&P 500, their European counterparts are pressing toward new highs, threatening to break out of a rounding bottom formation.

Our custom bank index contains some of the largest financial institutions in Europe, including UBS Group (UBS), Deutsche Bank (DB), HSBC Holdings (HSBC), Banco Santander (SAN), BBVA (BBVA), and Credit Suisse (CS). Like most European stocks, European banks have taken on a leadership role.

2/ Rising Rates and Dollar Strength Persist

The U.S. Dollar Index (DXY) is climbing, gaining over 1% in today’s session.

Below is an overlay chart of DXY and the 10-year U.S. Treasury yield (TNX) with a rolling 126-day correlation indicator in the lower pane:

Source: All Star Charts, with data provided by Optuma

Notice the consistent positive correlation between the U.S. benchmark rate and the dollar since the fall of 2021. This correlation intensified when the Fed began hiking interest rates last spring.

As we near the one-year anniversary of the inaugural hike of the current tightening cycle, the rising interest rate environment and the relationship between the dollar and U.S. Treasury yields remains intact.

Little has changed over the past year, and we could expect the dollar and yields to keep moving higher in sync. For now, rising yields suggest the U.S. dollar could have catching up to do.

3/ Animal Spirits Are Back

One of our favorite intermarket indicators to gauge risk appetite is the ratio of consumer discretionary stocks to their consumer staples counterparts. 

Discretionary stocks tend to be more cyclical and carry higher valuations than the relatively safer and more defensive consumer staples. Naturally, investors favor riskier stocks during bull markets, bidding up the price of discretionary stocks relative to staples.

The discretionary (RCD) vs. staples (RHS) ratio showed a positive divergence at the market bottom in early October, as it did not make a lower low when the S&P 500 did.

Source: All Star Charts, with data provided by Optuma

In fact, the ratio bottomed out in June and has put in a series of higher lows in the time since.

If RCD/RHS continues to trend higher, it could indicate greater risk-seeking behavior among investors. In this environment, we could expect the broader market to trend higher as well.

4/ Zooming Out on Crypto

When it comes to cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH) continue to hold above their former highs from late 2017.

These levels contain critical information, as they indicate where the largest cryptocurrencies peaked in the last bull market cycle.

Source: All Star Charts, with data provided by Optuma

The fact that former resistance has turned into support, with bulls having successfully defended these key polarity zones since last year, can be interpreted as a positive development for the crypto space.

As long as price is above these prior-cycle highs, the structural trends are intact for the largest cryptocurrencies. While the tactical trends are still uncertain, the crypto market has had a positive start to 2023.

Originally posted 7th March, 2023

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