Key Points
- Financials on the Verge of a Breakout
- High Beta Has the Edge vs. Low Volatility
- Copper/Gold Ratio Nears a Decision Point
- Lumber/Gold Likely Has More Upside
- Growth Remains Under Pressure vs. Value
Chart in Focus:
The S&P 500 Financials Index is trading at the top of the consolidation that has marked trading since April, on the verge of a breakout. The rising 50-day moving average has acted as support to pullbacks, which is likely to continue to be the case. We also note that pullbacks have not been able to push the 14-day RSI to oversold levels, indicating a lack of downside momentum.
The following relationships can help give us a sense of the level of risk appetite on the part of investors.
High Beta vs Low Volatility
The High Beta to Low Volatility relationship remains in a choppy consolidation as it holds above the rising 50 and 200-day moving averages. We would expect these moving averages to provide support to short-term pullbacks. The 14-day RSI is in the process of shifting to a bullish regime after a series of higher lows, increasing the odds that the price ratio will ultimately break to the upside.
Consumer Discretionary vs Consumer Staples (Equal Weight)
The ratio of Consumer Discretionary stocks relative to Consumer Staples stocks has found support at the rising 50-day moving average after failing to hold a breakout last week. The ratio remains in a consolidation that has been playing out for most of 2021, giving the rising 200-day moving average time to catch up. The consolidation is confirmed by the 14-day RSI, which is trading in the middle of the range and has not become overbought or oversold since January.
Copper vs Gold
The Copper/Gold ratio remains in the consolidation, struck between price-based support and the resistance at the 2018 highs as well as the 50 and 200-day moving averages. The 14-day RSI confirms the consolidation in price, as it trades in the middle of the range. Here too, the 200-day moving average has been given time to catch up to the price. Now we are on the watch for a break of the consolidation, which will have important implications for the equity market.
Lumber vs Gold
The Lumber/Gold ratio has resumed its advance after a brief pause. While the ratio trades between the 50 and 200-day moving averages, odds favor a move toward the 200-day as the 14-day RSI has been making higher lows following its bullish divergence. This is an indication that momentum is shifting back in favor of Lumber.
Small vs Large
The ratio of Small Caps vs. Large Caps continues to stall below price-based resistance and the 200-day moving average. As we discussed last week, the 14-day RSI has not been able to become overbought after a series of higher lows. We want to see strength confirmed by stronger momentum to have increased confidence that the move to the upside is likely to persist.
Growth vs Value
The Growth/Value ratio remains below price-based resistance and trapped between the 50 and 200-day moving averages. The 14-day RSI is trying to bounce, and it is encouraging that it failed to reach oversold levels on this move to the downside.
Take-Aways
Last week, we noted that these themes were a sloppy mess, and we are hard-pressed to say that much has changed this week. Most of the themes discussed above remain in consolidations without a clear indication of which way they will break. Perhaps the September Nonfarm Payrolls report, which will be released this morning, will serve as a catalyst for breakouts that can give us a clearer view of new trends.
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