By J.C. Parets & All Star Charts
Wednesday, 4th May, 2022
1/ An Important Top
2/ A Fresh Breakout for Energy
3/ It’s Still Early
4/ Checking on China
1/ An Important Top
Markets have been under pressure as weakness continues to spread, though we got a break from the downside volatility today. The market experienced a broad rally following the much-anticipated FOMC press conference this afternoon.
The big theme in recent weeks is distribution patterns. As more and more ranges violate their lower bounds, we’re left with completed tops.
The chart below is the equally-weighted S&P 500 challenging the lower bounds of its range. This is an excellent representation of what we’re seeing from the majority of major averages and sector indexes right now.
Seeing the equally-weighted S&P 500 dig in at its pivot lows and defend this support zone would be a step in the right direction for the overall market. Right now, that’s what it is doing.
There is still plenty of repair work for bulls to do considering all the tops that already resolved lower.
2/ A Fresh Breakout for Energy
While most investors are fixated on the shelf of former highs that the Energy Sector SPDR (XLE) is dealing with right now, on an equal-weight basis, bulls have already made their move. The chart below shows the Invesco Equal Weight Energy ETF (RYE) breaking out above a handful of peaks from 2016 and 2018.
As long as prices are above there, the bias is higher for this index. This also bodes well for the potential breakout in XLE. It could just be a matter of time until we see new highs there as well.
Energy continues to be a story of bullish rotation. In the stock market, we’re seeing new leadership emerge from refiners. In the commodity market, natural gas, heating oil, and gasoline stand out.
3/ It’s Still Early
Meaningful changes have been taking place beneath the surface in the growth vs. value relationship since last year.
Many of the relationships have accelerated as leadership has become more pronounced in favor of value-oriented areas. The energy vs. technology ratio is one way to analyze the trend in value vs. growth.
As you can see in the chart below, energy just reclaimed the dotcom-bubble lows relative to technology.
If XLE can stay above this level, it would support a bullish thesis on value and commodity-related stocks. More importantly, it tells us that there might be outperformance from energy stocks over the intermediate and long-term.
As for tech and growth, this is another piece of evidence that suggests we might want to stay away. These stocks could be out of favor for a sustained period of time.
4/ Checking on China
There has been some subtle relative strength coming out of China recently. While markets sold off around the world, the iShares China Large-Cap ETF (FXI) booked a 5% gain last week.
It’s following through this week with another 2.33% through Wednesday.
When we zoom out on the chart of FXI, this is what we’re dealing with:
While the trend is lower over the intermediate term, when we take a long-term view, China is still trading in a decade-long range. In fact, back in March, buyers stepped in at key former lows and defended the lower bounds.
Seeing FXI hold on at this key level is a constructive development. This could be a natural area for Chinese stocks to find their footing. While there is little evidence of that happening over any significant timeframe right now, there’s still a possibility. As China has lagged on a global scale, this would be positive for international stocks in general.
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Originally posted on 4th May, 2022
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