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The November 10th trading session saw the S&P 500 taking out the 3,900 level that we have been highlighting in our notes over the past several weeks. While this has been a welcome development for equity bulls, investors will likely want to keep an eye on the levels in the charts below that could add further confirmation to the bullish evidence at the index level. Additionally, three-month correlation readings are presented to provide investors historical context between these relationships and the S&P 500.

below is a preview of the Intermarket analysis report from Research by Potomac. 

November 10th Trading Session

Before we dive into intermarket themes, it’s important to provide a degree of context around the S&P 500’s market action in yesterday’s trading session. Bulls took note as the index gained an impressive 5.54%, the largest single day gain since April 6th, 2020. While single day gains/losses are noteworthy, it’s important to filter for trend. In the table below, results are provided for one and three-month returns when the S&P 500 returned greater than 5% while below the 200-day moving average.

What stands out about these results across one and three-month time frames is that while median gains have been positive, they have not been without significant risk. One month group returns clocked a 20th percentile loss of -5.62%, while three-month group returns clocked a 20th percentile loss of -13.11%. Additionally, win-rates for three-month returns have been significantly lower at 52.38% compared to one-month win-rates of 66.67%.

The reality of investing is that markets eventually bottom at some point, and it’s not uncommon to see historically large upside moves near the end of downtrends. Investors with a keen eye will note that five of these events occurred from March-April of 2020, and significantly disproportionate downside moves have occurred shortly after. While several of these events have been bullish developments, investors would be prudent to manage risk appropriately at these levels.

Consumer Staples Relative to S&P 500

The ratio of Consumer Staples Relative to S&P 500 remains in an uptrend above both the trendline of higher lows and the ratio’s rising 200-day moving average but pared back much of the recent relative gains in the November 10th trading session. Should the trendline and the rising 200-day moving average give way to the downside in the coming weeks, this could add further evidence that rally out of the October lows is more than just a countertrend move. Note that the outperformance on the part of Consumer Staples has historically been inversely correlated with the S&P 500, with the rolling three-month correlation coming in at -0.694.

1-5 Year Investment Grade Corporate Bonds (IGSB) Relative to High Yield

The ratio of 1-5 Year Investment Grade Corporate Bonds (IGSB) Relative to High Yield continues trading above the rising 200-day moving average and the highlighted trendline of higher lows. Here too, these two levels provide an area for investors to watch in terms of risk sentiment. Should they break down, it could be incrementally bullish for equity investors. Note that the rolling three-month correlation with the ratio and the S&P 500 has been persistently negative since the start of the year, coming in at -0.870 currently.

Precious Metals Relative to Industrial Metals

The ratio of Precious Metals Relative to Industrial Metals has bucked the trend of its counterparts in the November 10th trading session in a small but noticeable rise from relative support at the highlighted zone above the rising 200-day moving average. Here too, these are two levels for investors to look for a breakdown to occur that could add further evidence to risk sentiment. While the rolling three-month correlation to the S&P 500 has been negative for most of the year, the current reading of -0.301 suggests that, though it provides value in terms of risk sentiment, the correlation reading isn’t as deeply negative or persistent as the relationships in the previous two charts.

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