By J.C. Parets & All Star Charts
Wednesday, 3rd May, 2023
1/ Will Yields Respond to the FOMC Cue?
2/ Capital Markets Show Cracks
3/ Can Financials Hold the Line?
4/ Heating Oil Slips to New Lows
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1/ Will Yields Respond to the FOMC Cue?
Now that the Federal Open Market Committee (FOMC) has raised interest rates again, will yields finally roll over?
Despite key intermarket ratios suggesting an intermediate-term top for over a year now, yields remain elevated. The copper vs. gold and regional banks vs. REITs ratios provide excellent examples:
Notice both ratios peaked in mid-2021, along with many cyclical assets. Their current breakdowns imply that yields have not only peaked but will likely roll over in the coming weeks and months.
While the copper vs. gold ratio holds within a broader range, it’s steadily turning lower. And regional banks can’t catch a bid on absolute or relative terms.
These are not characteristics of a rising yield environment. Based on the chart above, it could be a matter of when and not if yields receive their cue from the FOMC.
2/ Capital Markets Show Cracks
All eyes have been on regional banks since early March—and for good reason—as the dominos just keep falling. The collapse of First Republic marked the largest bank failure since the 2008 financial crisis.
However, it’s not just the banks that are under pressure. The entire financial sector is showing cracks as investors are also repricing broker-dealers, exchanges, and other capital markets firms that have exposure to lending.
Here’s the SPDR S&P Capital Markets ETF (KCE) sporting a short-term topping formation that started late last year:
Since this is a short-to-intermediate term price structure, we have a 50-day moving average (MA) on the chart as opposed to our standard 200-day MA.
Notice how the moving average crested and rolled over just above the right shoulder, putting a cap on prices since early March. The resulting formation is a textbook head and shoulders top, or potential top. KCE just closed at fresh year-to-date lows today.
If bears can achieve follow-through and violate the neckline around 78 in the coming sessions, the path of least resistance could be lower for this industry group. We’re watching the lows from last October as the next potential line of support.
3/ Can Financials Hold the Line?
When it comes to the financial sector, volatility continues to expand as regional bank stocks remain vulnerable. However, the pre-financial crisis highs in the large-cap SPDR Financial ETF (XLF) remain intact.
The chart below shows where financials peaked during previous cycles in 2007, 2018, and 2020, making it a critical level of interest:
As you can see, price has been holding above this polarity level of around 30.50 for some time now.
As long as XLF remains above its pre-financial crisis highs, the weakness in the financial sector is unlikely to trigger a broader market selloff. That could be the line in the sand for the bulls. However, if price breaches this support zone, there could be significant structural damage and bearish implications for the broader market.
4/ Heating Oil Slips to New Lows
Crude oil has undercut its prior-cycle highs and is falling fast. Bulls have stepped aside as bears have taken full control of the entire energy space, from commodity contracts to their related stocks.
While the past two days of selling pressure have been extreme, it’s unsurprising given the lack of demand among crude oil distillates.
Here is a chart of heating oil futures tumbling below their former 2018 highs:
Those former highs coincide with the prior cycle’s peak and the breakout level from a multi-year base. It’s hard to imagine demand picking up for the energy space if heating oil and gasoline prices continue to fall.
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Originally posted 3rd May 2023
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