Key Points
- Transports: The Next Data Point to Break the Bears’ Hearts
- Wants Over Needs as Discretionary Leads Staples
- Key Test for the Copper/Gold Ratio
- Think Bigger as Small Caps Continue to Lag Large Caps
- Growth Can’t Make Much Upside Progress
Chart in Focus:
The lack of confirmation on the part of the Transports has been another part of the bear case on equities. Yesterday we discussed how the “bad breadth” thesis was breaking down. Today we will point out that the S&P 500 Transportation Index has made a powerful move through the 50-day moving average and is breaking short-term resistance. At the same time, the relative trend is moving higher and has also broken the 50-day moving average. If the Transports get in gear, the bear case will weaken further.
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 the consolidation that has been in place since March. However, with the ratio above the 50 and 200-day moving averages and the 14-day RSI making higher lows, odds favor a resolution of the consolidation to the upside.
The ratio of Consumer Discretionary stocks relative to Consumer Staples stocks has broken topside from the consolidation that we have been highlighting, remaining above the rising 50 and 200-day moving averages. This is a signal that investors are taking on more risk as they show a willingness to own the stocks of companies that make the things that we “want” over the stocks of companies that make the things we “need.” Now we want to see momentum confirm, with the RSI trading into an overbought condition.
Copper vs Gold
Last week we highlighted the potential breakout on the horizon for the Copper/Gold ratio. This week will find out if there is a false breakout in play. We will often see old resistance become new support after a breakout takes place. If that is the case now, we would expect this ratio to move higher in the next few days. If the breakout level fails to hold, we are likely to see a test of the rising moving averages. With the RSI holding in a bullish regime, we lean in the direction of support holding.
Lumber vs Gold
The Lumber/Gold ratio is pausing in a bit of a no man’s land between the 50 and 200-day moving averages. The 14-day RSI likely holds the key to the trend in the near term as it pulls back into the uptrend line from the July lows. Odds favor this being a pause within a new bull trend that will see the 200-day moving average broken to the upside.
Small vs Large
The ratio of Small Caps vs. Large Caps continues to stall below price-based resistance and the 200-day moving average. We have highlighted the lack of upside momentum by the fact that the 14-day RSI was not able to become overbought on the initial move higher. Now, this indicator is breaking the bullish trend line from the July low. We find it hard to favor Small over Large until resistance and the moving average are broken to the upside.
Growth vs Value
The Growth/Value ratio continues to have a hard time gaining upside traction as I dance with the 50-day moving average while holding below price-based resistance. Until resistance is broken with confirmation from momentum, it is hard to make a case for outperformance by growth stocks. A break of the 200-day moving average would give a clear advantage to value stocks.
Take-Aways
Slowly but surely, the bear case on the equities is being debunked; now, the Transports are moving to the upside on an absolute and relative basis. Key themes point to a “risk-on” environment that leans toward larger stocks and is in the direction of value.
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