Key Points
- South Korea on the Verge of a Breakout
- Discretionary Improves vs. Staples
- Commodity Themes Remain Risk Averse
- Growth Over Value Gains More Traction
- If Small is Going to Lead, this is the Place to Start
Chart in Focus:
We have written a lot about the improvements in the Technology sector over the past few weeks. Another development that supports these improvements is the fact that the Kospi 200 Index (South Korea) is on the verge of breaking to a new high on an absolute basis. A move to the upside would break the index from the consolidation that has been in place since January. The rising 50-day moving average has acted as support and odds favor those new highs will be achieved.
Relative to the S&P 500, the Kospi is trying to stabilize 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 continues to trade in a “choppy” manner. The bull case is that the ratio remains above the rising 50 and 200-day moving averages, with the 50-day acting as support to a recent pullback. At the same time, trend is also above price-based support at the April lows. The bears will point out that the recent highs were not confirmed by momentum, with the 14-day RSI making a lower high. This divergence would be confirmed with a break of support.
Consumer Discretionary vs Consumer Staples (Equal Weight)
The ratio of Consumer Discretionary stocks relative to Consumer Staples stocks has made a strong move to the upside this week, retaking the 50-day moving average after holding support at the 2018 high. The rising 200-day moving average is not a factor currently. The 14-day RSI remains stuck in the middle of the range. We note that it has not become oversold as the ratio has consolidated, but it also has not broken a streak of lower highs.
We are closely watching for the directional break to send a signal about risk appetite in the market.
Copper vs Gold
The Copper/Gold ratio continues to trade between the support and resistance levels that we highlighted in this note last week. The ratio is below the 50-day moving average which is still rising for now. Interestingly, as the ratio has consolidated, the RSI never reached an oversold position, keeping the momentum of the larger trend to the upside.
Lumber vs Gold
Last week, we mentioned that if the Lumber/Gold ratio were going to make a stand, this would be the place to begin. Thus far, no stand has been made. The ratio has moved below the 200-day moving average and price-based support. The 14-day RSI remains in an oversold position. Unless there is a rally above these levels in the near-term, the odds are that this ratio is going to test the 2020 lows.
Growth vs Value
The Growth/Value ratio for the S&P 500 is in the process of breaking above the 200-day moving average, another step in Growth regaining its leadership position. The 50-day moving average is beginning to turn higher, signaling that the intermediate-term trend is now to the upside. The 14-day RSI now becomes an important signal. Strong bullish trends tend to absorb overbought readings and continue to the upside, as was the case for much of 2020. How the ratio reacts to the current overbought reading will be very informative.
Small vs Large
The ratio of Small Caps to Large Caps continues to dance with price-based support and the 50-day moving average as it consolidates in the near-term. Should support give way, the rising 200-day moving average would likely be tested. The 14-day RSI is in the middle of the range, confirming the consolidation, but we note the series of higher lows. This remains a logical level for Small Caps to begin to reassert a leadership position.
Take-Aways
Is Growth regaining leadership? The improvement in Growth over Value, while Lumber and Copper remain under pressure vs. Gold, is the development that we are watching most closely.