By J.C. Parets & All Star Charts
Wednesday, 26th July, 2023
1/ Tech Revisits the Scene of the Crime
2/ Rotation Hits Commodities
3/ Oil Services Remain Resilient
4/ Steel Stocks Look Strong
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1/ Tech Revisits the Scene of the Crime
Although technology (XLK) has been the best-performing sector this year, the relative trends suggest a potential pause in recent leadership.
As you can see, XLK is pressing against a critical resistance level relative to the Russell 3000 (IWV):
This zone represents the dotcom bubble highs from 2000, making it a logical place for XLK to halt its recent outperformance.
It doesn’t mean it will, of course.
If the XLK/IWV ratio breaks through this overhead supply, we could see further outperformance from tech and growth stocks over the intermediate and long term.
2/ Rotation Hits Commodities
Rotation is underway among commodities.
Our equal-weight energy commodity index has gained almost 20% since May 4 (when the 10-year yield posted a key pivot low and gold futures peaked). That’s more than twice the upside of other commodity groups.
The other major procyclical commodity group, base and industrial metals, has also begun to rise, gaining roughly 5% over the same period.
Right now, the relative strength of energy contracts also jibes with the action in the U.S. stock market, with technology names pausing at logical resistance levels as industrial stocks break out of bullish consolidations.
A healthy rotation is evident in stocks and commodities as buyers seek out new investment opportunities.
3/ Oil Services Remain Resilient
Speaking of energy, one particular industry group that catches our attention is oil services.
Check out the overlay chart between the Oil Services ETF (OIH) and crude oil futures displayed back to 2005:
As you can see, despite having a positive historical correlation, crude oil has been hanging near support while OIH is pushing against new 52-week highs.
Oil services stocks don’t seem to mind crude oil’s lack of participation. And that’s important information!
Under this scenario, investors might want to want to look at individual names within this subgroup for the best asymmetrical risk-to-reward setups.
4/ Steel Stocks Look Strong
How bad can the market environment be if steel stocks are catching a bid?
Here’s the Steel ETF (SLX) breaking out of an inverted head and shoulders pattern:
These patterns are popping up all over our metals and mining charts and even industrial stocks.
The breakout in SLX marks another data point for stock market bulls and highlights the versatile nature of this classical charting pattern.
Investors often pigeonhole inverted head and shoulders as reversal formations. But in fact, they can also act as continuation patterns.
One thing is clear: The uptrend continues for steel stocks and many other cyclical value-oriented market areas.
That’s more good news for investors.
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Originally posted 26th July 2023
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