By J.C. Parets & All Star Charts
Wednesday, 5th July, 2023
1/ Rising Rates Persist
2/ Dow Theory Confirms the Bull Market
3/ Industrials Set Record Highs
4/ Rotation and Rates Point to Energy
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1/ Rising Rates Persist
It’s undeniable. U.S. interest rates continue to rise across the curve.
Today, the two-year yield climbed to 500 basis points (bps), challenging its March high. If and when it breaks above that level, it will reach rates not seen since the summer of 2007.
A quick look at the U.S. two-year yield tells the story:
Interest rates are on the verge of breaking out after a period of contraction. And they would be doing so in the direction of an underlying uptrend.
While rising rates accompanied strong selling pressure for all asset classes last year, stocks don’t seem to mind.
In fact, tech names are diverging from other long-duration assets. And procyclical sectors such as industrials are breaking to new all-time highs.
Perhaps risk assets have adjusted to a new rising rate regime.
2/ Dow Theory Confirms the Bull Market
One of the better-known Dow Theory tenets is the concept of confirmation or the idea that the Industrial Average and Transports should confirm each other.
As the chart below shows, the Dow Jones Industrial Average (DJI), Dow Jones Transportation Average (DJT), and the PHLX Semiconductor Index (SOX) are all pressing against new highs in tandem.
We like to add semiconductors to our analysis, as we view these companies as modern transportation stocks.
All three indexes provide valuable insight into overall market health and give us excellent information regarding the future direction of stocks.
Whether you look at technology or other cyclical groups, the vast majority are participating to the upside.
Based on the weight of the evidence, this strongly confirms the primary uptrend in U.S. equities and reaffirms the bull market we have been in for some time now.
3/ Industrials Set Record Highs
When we dive beneath the surface looking for confirmation on a sector level, the Industrial Sector ETF (XLI) demands our attention as it reaches new all-time highs.
XLI includes a diverse grouping of stocks, making it an excellent gauge to measure market health. Unsurprisingly, it also holds the strongest correlation to the major U.S. averages of any market sector.
As you can see, after a year of consolidating in a well-defined range, buyers were able to absorb all the overhead supply and send prices higher.
As long as XLI holds above former highs, we want could see a healthy market in the foreseeable future and continued rotation into other cyclical areas of the market.
4/ Rotation and Rates Point to Energy
Two developments illuminate the markets: a healthy rotation among stocks and a persistent rise in rates.
As these two key themes guide the markets into the second half of the year, our attention turns toward energy.
The overlay chart of the U.S. 10-year yield and crude oil futures highlights why:
If rates continue to rise—and we see no signs suggesting otherwise—crude oil and energy more broadly will likely follow. Notice how closely these two charts track each other over longer time frames.
We’re also witnessing a robust rotation into industrials and burgeoning strength from materials. We imagine that this theme could continue to play out in the coming months and quarters as buyers bid up other procyclical sectors of the market, including energy.
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Originally posted 5th July 2023
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