We kick off each month with a review of the significant trends defining financial markets, states Steve Strazza of AllStarCharts.com.
We identify the sectors and the tickers we want to own. We talk about what the market would have to do to confirm a major change in trend.
Here's the breakdown for May...
1. Can Financials Hold the Line?
Regarding the financial sector, volatility remains high as regional banks continue to blow up. However, the pre-financial crisis highs in the Large Cap Financial Sector SPDR (XLF) remain intact. This is huge, and, for bulls, it needs to remain the case. This level represents where financials peaked during previous cycles in 2007, 2018, and 2020, making it a critical area of interest.
As you can see, price has been holding above this polarity level of around 30.50 for some time now. We're convinced that the financial sector weakening will not trigger a broader market selloff as long as XLF remains above its pre-financial crisis highs. That’s the line in the sand for the bulls. However, if we breach this support zone, there will be significant structural damage and bearish implications for the broader market.
2. Crude Oil Slips Through the Cracks
Crude oil continues to undercut its prior-cycle highs before quickly rebounding to repair the damage. We saw crude fall into the 60s in both March and again last week. However, in both instances, bulls stepped in almost immediately to make the save. Whether or not these are false starts or failed moves is the big question. For now, they appear to fail. In the monthly chart below, notice how crude just booked its first positive month in April following five months of losses:
Maybe this is the start of something, as this green monthly candle also symbolizes bullish follow-through on the long-wicked candle from March. For us, it’s all about the 2018 highs for crude. The prior-cycle peak marks our line in the sand. When we combine this level with the 2022 lows, we have a critical zone of interest between 70-75. If we’re above it, energy gets the benefit of the doubt. If we’re below it, we’re out and looking for further downside from the whole group.
3. Key Intermarket Ratios Point Rates Lower
Powell has spoken, so will interest rates finally roll over? Despite key intermarket ratios suggesting an intermediate-term top in interest rates for over a year now, yields remain elevated. The copper versus gold and regional banks versus REITs ratios provide excellent examples:
Notice both ratios peaked in mid-2021, along with many cyclical assets. But their current breakdowns imply that rates have not only peaked but will likely roll over in the coming weeks and months. To be fair, the copper/gold ratio holds within a broader range. Nevertheless, it’s turning lower. Regional banks can’t catch a bid on absolute or relative terms. That’s never a good thing. These are not characteristics of a rising rate environment. Based on the chart above it seems more a matter of when and not if yields catch lower.
To learn more about Steve Strazza, please visit AllStarCharts.com.