Was That It
for the Pullback?

Key Points

Chart in Focus:

It appears that the shift to selling strength (red arrows) that we had been highlighting was short-lived. Yesterday’s price action for the S&P 500 was powerful, with the open at the low of the day followed by a strong rally to close near the high of the day. At the same time, the index broke the downtrend that has been in place since the beginning of September. Finally, we note that the index has been making higher lows since October 4th.

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 continues to trade in the consolidation that has been in place since March. This chart is a great example of the choppy rotations that have been playing out under the surface of the market for most of the year. 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.

Copper vs Gold

The Copper/Gold ratio has pushed to the top of the consolidation and is testing the highs from 2018. The ratio is above the 50 and 200-day moving average, with the latter having “caught up” to the price trend. We are leaning in favor of the breakout taking hold as the 14-day RSI has moved above the downtrend line from early 2021, a sign that momentum is shifting to the upside.

Lumber vs Gold

The Lumber/Gold ratio continues to move to the upside following the bullish divergence that we have been highlighting in these pages for the past few weeks. The 50-day moving average is moving higher, signaling that the intermediate-term trend is now to the upside, and the ratio has running room to the 200-day moving average. Strength for the ratio is confirmed by the 14-day RSI reaching overbought conditions, as momentum is with the price trend.

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 have discussed for the past two, the 14-day RSI has not been able to become overbought after a series of higher lows. We want to see strength confirmed by momentum to have confidence that the move to the upside is likely to persist. Our view on this ratio is neutral until resistance is overcome.

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 moving higher but remains in a bearish regime for the time being. 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