Key Points
- Two Key Breakouts for Small Cap Energy
- New Highs for High Beta vs Low Volatility, Will They Hold?
- Copper and Lumber Both Fading Relative to Gold
- Value Over Growth Remains a Key Trend
- Small Caps Reasserting Leadership vs. Large Caps
Chart in Focus:
While Small Cap stocks begin to reassert a leadership position relative to Large Caps, we point out that the S&P 600 Energy Sector is recording new breakouts on both an absolute and relative basis. This week, the index has pushed above the early 2020 high, while holding above the rising 50-day moving average. Relative to the S&P 500, Small Cap Energy is in the process of completing a bearish to bullish transition which began at the COVID lows. The ratio is above the 50-day moving average.
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 traded to a new high this week before pulling back slightly yesterday. The ratio is above the rising 50 and 200-day moving averages, both of which are moving higher. While the 14-day RSI remains in a bullish regime, we note that this week’s 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 has failed to hold above the 50-day moving average, which is moving lower in the near-term. 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
The weekly trend in the Copper/Gold ratio remains below the key resistance level that we have been highlighting, as does the 10-year yield. The rolling 13-week correlation between the ratio and the 10-year yield remains positive.
Zooming in on the daily data, we can see that Copper/Gold ratio and yields are holding near-term support. How this stalemate between the weekly and daily trends plays out will have important implications for some of the key themes in the market. A resolution to the downside will likely put the reflation/value trade into question, a move higher will signal that it still has legs.
Lumber vs Gold
The Lumber/Gold ratio has moved below the rising 50-day moving average, which has acted as support to pullbacks during the current uptrend. The rising 200-day moving average, around the breakout level, would be the next logical target should current weakness persist. Thus far, the uptrend retains the benefit of the doubt, as the 14-day RSI remains in a bullish regime. We also note that the series of higher lows for the indicator remains in place.
The themes below can show us where investors are allocating capital within the equity market.
Growth vs Value
The relationship between Growth and Value continues to trade to the downside, below the 50 and 200-day moving averages. At the same time, the 14-day RSI is moving lower after failing to exit a bearish regime on the recent rally attempt. This shift in momentum puts our support zone in play in the near-term. For now, Value over Growth remains the prevailing trend.
Small vs Large
The ratio of Small Caps to Large Caps continues to respond well from the test of support that we highlighted last week, retaking the 50-day moving average. The 200-day moving average is well below current price levels. The 14-day RSI remains in a bullish regime and has been making a series of higher highs as of late. Small Caps retain the benefit of the doubt until support is broken.
Take-Aways
Trends continue to favor Value over Growth and Small Caps over Large Caps. However, there are signs that have the potential to upend this dynamic. We are focused on the relationships in the commodity markets, where Copper may be losing traction vs. Gold, while, at the same time, the Lumber/Gold ratio has come under pressure. Further weakness in these relationships could likely impact our prevailing views.