By J.C. Parets & All Star Charts
1/ Dow Jones Transportation Average Achieves Record Highs
2/ Materials Break Out
3/ Does New Leadership Have Enough Gas?
4/ The Dollar Pumps the Brakes
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1/ Dow Jones Transportation Average Achieves Record Highs
The Dow Jones Transportation Average (DJTA) is officially the first major U.S. index to achieve new all-time highs during the current cycle.
Here’s a look at the monthly chart:
After bottoming out in September last year, transports built a constructive base. Fast forward to just last month, and buyers forced an upside resolution from this rounding bottom reversal pattern. The path of least resistance is now higher for this key procyclical index.
On a monthly closing basis, DJTA just became the first major average to make fresh all-time highs. It could be only a matter of time until the others follow.
2/ Materials Break Out
When we dive beneath the surface, we see participation expanding in value-oriented sectors.
Here’s the Large-Cap Materials ETF (XLB) reclaiming its year-to-date highs this week:
Not only is the price taking out a critical resistance level, but it is reaching its highest level in over a year, thus adding XLB to our growing list of new highs.
Notice in the lower pane that momentum, as measured by the 14-period relative strength index (RSI), remains in a bullish regime. If we see an overbought reading in the coming days, this would confirm the breakout.
As long as these new highs stick, we could see rising prices for materials stocks during the second half of the year.
3/ Does New Leadership Have Enough Gas?
Whether you zoom out 12 months to last summer, anchor from the lows last fall, or analyze performance on a year-to-date basis, the trend in long-term leadership is clear. It’s all tech and growth over any significant time frame. Technology and other growth sectors are also outperforming over the trailing quarter.
However, since the third quarter began just over a month ago, we are witnessing a potential changing of the guard as it relates to sector leadership.
Here’s a performance chart of the equal-weight sector indexes during the second half of 2023:
As you can see, energy is just about doubling the performance of the next best group so far in Q3. And it is not just energy—other 2023 laggards like financials and materials are also leading the way since July.
This is only one month of price action, so we need to see more evidence of reversals in these relative trends before becoming more bullish on value and cyclical stocks. With that said, the evidence is building quickly that this could be the place to be in the second half of the year.
4/ The Dollar Pumps the Brakes
When the U.S. Dollar Index (DXY) printed fresh 52-week lows and the G-10 currency index retested its year-to-date lows, our U.S. dollar advance-decline (A/D) line (comprising 29 USD pairs) had yet to undercut its pivot lows from mid-June.
The A/D line indicated a lack of broad dollar weakness.
Check out a triple-pane chart of the aforementioned indexes with the USD advance-decline line in the lower pane:
Fast forward to today, and all three lines are catching higher—DXY included.
A couple weeks of strength hasn’t erased months of meandering. But if a failed DXY breakdown comes to fruition on the heels of a swift rally, risk assets will likely fall under pressure.
It all depends on which risk assets we’re talking about. Commodities and cyclical value-oriented stocks could better withstand dollar strength since they benefit from elevated rates.
On the other hand, headwinds will likely increase for the major U.S. stock indexes.
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Originally posted 1st August 2023
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