Key Points
- Communication Equipment Breaks to New Highs
- Commodity-Based Themes Point to a Possible Regime Shift
- Discretionary vs Staples Remains in a Consolidation
- Growth Builds a Base vs Value
- The Trend Still Favors Small Caps Over Large
Chart in Focus:
Earlier this week, we highlighted that there were signs of life in the Technology sector and the recent relative highs within Software. Today, we highlight another group in the sector, Communication Equipment. The index is breaking to a new high on an absolute basis after a successful test of the rising 50-day moving average.
On a relative basis, Comm Equipment traded to a 21-day high yesterday, has retaken the 50-day moving average, and is on the verge of completing a bearish to bullish reversal.
Key Themes and Relationships
We update our views on the key relationships that we track across the market to get a sense of investor’s willingness to take on risk. We also highlight the trends playing out in major factors such as Growth, Value, Large Cap, and Small Cap.
High Beta vs Low Volatility
The ratio of the S&P 500 High Beta Index relative to the S&P 500 Low Volatility Index is fading from record highs this week but remains in an uptrend, above the rising 50 and 200-day moving averages. While the 14-day RSI remains in a bullish regime, we continue to note that the recent high was not confirmed, as the indicator made a lower high.
Consumer Discretionary vs Consumer Staples (Equal Weight)
The ratio of Consumer Discretionary stocks relative to Consumer Staples stocks remains below the 50-day moving average. Support at the 2018 high is now being tested once again. Should this level break, the rising 200-day moving average will come into play. The 14-day RSI has not become oversold as the ratio consolidates, but we are mindful of the series of lower highs since the start of the new year. This is an early warning that upside momentum may be waning.
Copper vs Gold
Switching to a daily chart this week, we can see that the Copper/Gold ratio remains below the key resistance level that we have been highlighting, as does the 10-year yield. Both the ratio and the yield have lost their 50-day moving averages. Continued weakness in the Copper/Gold Ratio could be a sign that expectations for global growth are slowing. Should this be the case, we would expect to see investors rotate out of the cyclical areas of the equity market and into the secular growth themes.
Lumber vs Gold
The Lumber/Gold ratio has moved further below the rising 50-day moving average. The rising 200-day moving average, around the breakout level, would be the next logical target should current weakness persist. The 14-period RSI has not yet become oversold, but it has broken the series of higher lows that had been in place since the start of the year. This is another sign that investors may be pricing a slower global growth environment in the months ahead.
The themes below can show us where investors are allocating capital within the equity market.
Growth vs Value
Coinciding with weakness in the commodity relationships mentioned above, Growth stocks have seen near-term support relative to Value stocks. The Growth/Value ratio has moved above the 50-day moving average but remains below the declining 200-day moving average. The 14-day RSI is in the middle of the range. Retaking the 200-day moving average will shift the trend in favor of Growth, while breaking support means that Value remains leadership.
Small vs Large
The ratio of Small Caps to Large Caps remains above the support level that we have been highlighting, as well as the 50-day moving average. The rising 200-day moving average is much lower and not a factor in near-term analysis. The 14-day RSI is in the middle of the range but continues to make a series of higher lows. Small Caps retain the benefit of the doubt until support is broken.
Take-Aways
Further signs of strength within the Technology sector, while commodity-based themes continue to weaken, point to the possibility that investors are preparing for a slower growth environment.