By J.C. Parets & All Star Charts
1/ Seasonality Suggests a Break
2/ Building Up Energy
3/ Defensive Sectors Join Participation
4/ BOJ Goes With the Flow
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1/ Seasonality Suggests a Break
With July in the books, the equity markets delve into a historically slow period for U.S. equities (at the index level at least).
According to the Pre Election Cycle, if the S&P 500 is going to take a breather, this would be a perfectly logical time in the cycle to catch its breath.
As you can see, the current S&P performance (red line) has followed the seasonal trend (blue line) closely over the trailing year.
If it continues, it will mean flat prices for the S&P 500 into the back half of the year. This would make sense as rotation moves down the market cap scale into value-oriented cyclical sectors.
Remember, the stock market is a market of stocks.
2/ Building Up Energy
Energy stocks have made absolutely no progress for more than a year now. The equal-weight large-cap and small-cap indexes peaked in early June of last year and have been trapped in a sideways range ever since.
When we zoom out on these trends, things look much better. Energy stocks remain in a structural uptrend, as the sector enjoyed big gains in 2020 and 2021 and was the clear market leader when stocks corrected in 2022.
When we zoom in on the chart, things also look much better. Since late June, the Invesco Small-Cap Energy ETF (PSCE) has returned roughly 23%. The Equal-Weight (large-cap) Invesco Energy ETF (RSPG) is up about 17%. While PSCE is making fresh eight-month highs, RSPG isn’t far behind as it challenges year-to-date highs.
The near-term strength and improving internals from energy stocks, combined with a strong long-term uptrend, suggest this is an area that should benefit from the current sector rotation.
As long as crude oil and large-cap energy indexes are above their 2018 highs, the bias is higher for the entire group, and the oil field could present bullish opportunities in the second half of 2023.
3/ Defensive Sectors Join Participation
The bulls remain in control.
It doesn’t matter where you look, as even some of the defensive sectors are catching a bid.
Check out the Small-Cap Consumer Staples ETF (PSCC) pressing against new all-time highs.
After two years of consolidating in a well-defined range, price has resolved to the upside. It only took seven attempts!
As we like to say here at All Star Charts, “The more times a level is tested, the higher the likelihood that it breaks.”
Seeing defensive sectors break higher in absolute terms speaks of broadening participation and risk appetite—two healthy bull market characteristics we can check off our list.
4/ BOJ Goes With the Flow
The Bank of Japan (BOJ) adjusted its yield curve control policy last week, allowing the 10-year Japanese Government Bond (JGB) yield to rise 1% from 0.5%.
While the decision shocked global investors and caused a spike in the JGB benchmark rate, markets seemed unfazed, especially foreign exchange (FX) markets.
The Japanese yen (the chief casualty of recent BOJ policy) continues to fall against other developed market currencies despite last week’s shift. But the recent policy change has more to do with acceptance than affect.
The BOJ’s actions reveal an unwillingness to fight the unrelenting rise in global interest rates and lingering inflation, supporting our rising rate regime thesis.
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Originally posted 31st July 2023
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