Published October 20, 2017
We took a couple of charts from a recent presentation made by technical analyst J.C. Parets and his firm All Star Charts to highlight a couple of longer-term trends that you might find interesting.
First, the U.S. dollar has been falling all year as the expected rise in interest rates has not really played out and non-U.S. economies have gained strength. Technically, this drop in the dollar is very near a point of key support, one where we would expect the dollar to stop falling and return to a multi-year uptrend.
Chart 1: The U.S. dollar sits on support ready to rise
A rising dollar doesn’t necessarily mean anything in particular for stocks. However, it does have a secondary impact on commodities like oil, copper, gold, et al. The resumption of the rise in the dollar would mean lower commodity prices, all else equal. Recently, global growth has been so strong that the primary impact of supply and demand could keep industrial metals like copper moving upward.
Second, the shift away from defensive stocks in favor of more economically sensitive stocks bodes well for the market. The chart below displays the ratio of the price of consumer staples stocks to the broad market. If the line is moving higher, investors are choosing to invest in the defensive consumer staples sector more so than the stock market overall. When the line is moving lower, investors are more bullish and preferring to own the broad stock market rather than defensive consumer staples. We can see that the ratio is falling and has broken lower, suggesting a significant preference for the stock market over this defensive sector. While this won’t move in a straight line, the breakdown does suggest a notable change in investor attitudes toward risk, one that could persist for quite some time.
Chart 2: Investors shift away from defensive sectors
Last week, we showed charts suggesting the market was at an extreme level of buying in the very short-term. This week, we step way back to show that stocks broadly and the U.S. dollar are poised for further gains in the longer-term. Whether that comes to pass or not, our market models will keep us on the right side of the market and able to profit regardless.
Stocks found further reasons to be joyful this week with markets flat to higher every day. The week began with a +0.2% gain as financial stocks bounced back from their post-earnings blahs. Healthcare stocks kept the market flat Tuesday with strong earnings from insurer UnitedHealth (UNH) and Johnson & Johnson (JNJ) pushing the sector’s strength. A mixed day Wednesday with Dow component IBM surging +9% to recoup its losses year-to-date. That pushed the Dow Industrials up +0.7% while the other large-cap indexes held flat. A third straight flat day of trade Thursday. However this one began on a decidedly negative note after a nearly -2% plunge over night in the Hong Kong market and similar weakness in market heavyweight Apple (AAPL) on reports of weak iPhone 8 sales and connection issues with the Apple Watch. The drop in Apple had the Nasdaq down -1% early in the session before a day-long recovery to close down -0.3%. Bulls had to be pleased with the reversal higher. That positive sentiment led to a Friday which saw stocks drift higher all day. Confidence that tax reform could pass supported financial stocks Friday en route to a +0.4% daily gain.
Stocks have now rattled off 8 of 9 positive weeks with the S&P 500 (SPY) adding +0.85% on the week while the Nasdaq 100 (QQQ) rose +0.25%. The small-cap Russell 2000 (IWM) continued to hold its sharp September move with a +0.41% gain recovering the prior week’s slip.
Warm wishes and until next week.