As we close another Option Expiration week the equity markets are making there way to challenge the highs. I have watched many sit in amazement and frustration for the last couple of weeks expecting a reversal because we were too “overbought.” All I can say is….been there and it didn’t work out in my favor. I am not advocating chasing, but not being involved in strong moves like this can get costly in a hurry. The markets have been telegraphing some of this for weeks now leaving clues in the Intermarket RS list and the charts I post. This week I thought I would try something different and put it all together in a post as opposed to posting each chart individual. Let me know in comments if you like this format better.
A look at the list above shows an almost perfect set up for equities. With the top 3 spots going to equity indexes and the $DIA is still in the top half. Contrast that with $TLT and $IEF falling from grace in a hurry confirming the equity move. Finally, $UUP slowing moving lower as fear subsides for now. These rankings can change in a week, but the current move couldn’t ask for a better Intermarket backdrop as support. Even the within the major categories the order is positive. Equities have higher risk indexes on top. Bonds go from $JNK to $LQD to $IEF and $TLT again favoring risk. Finally Commodities have $USO on top with $GLD and $SLV lower. The one enigma here is $JJC which would be good to see higher, but all in all picturesque. Next we look at the charts which are grouped by asset class, but in RS ranking within those groups.
Overall Equities continue to grind higher through the summer now back at the Spring highs. $QQQ back in the lead is a good sign with $IWM coming right behind it. Even though the IWM is not challenging the highs, the large Inverse Head and Shoulders pattern formed could easily support more catch up from small caps.
If this pattern completes the measured move (MM) is 91. The recent increase in breadth figures also suggests this is a good possibility. $SPY is also hanging in the #3 RS Spot.
From an Intermarket perspective you can’t even argue with the laggard being the $DIA. This configuration leans toward higher prices in the coming months.
Bonds and Currency
In the bond world we see the top RS performer is high yield bonds $JNK which still refuse to crack.
From an Intermarket perspective these should stay strong relative to other bonds if things are improving, but if we get a real rush to equities I still expect $JNK to see profit taking through from a rotation perspective. We are already seeing some of that in $LQD
The money moving out of $LQD is likely heading towards equities as many portfolio managers are underinvested in this rally. Especially since the May drop when many bailed for the summer. The real confirmation of risk appetite comes from the Treasury area. $IEF had no support this week while $TLT landed squarely on the 50sma.
Both of these saw hard sell offs as money rotated out of safety for the last couple of weeks. The lack of progress in the $UUP is another tribute to this considering we are still in the middle of the Euro debacle. The $UUP chart got worked by the moving averaged all week.
If the $UUP can make a turn here and head back up we could start to see shifts in this current structure; but so far looks more like consolidation than reversal.
Commodities are a mixed bag. Energy and Ags are killing it while Metals continue to be a bit of a drag. The top RS in the asset class is the $USO.
The lack of fear is holding these in check, but they also have history of going with risk from time to time. I would not rule out a strong run higher if the Ascending Triangle in $GLD does break out. The fly in the ointment of this bullish Intermarket picture has to be $JJC which is doing nothing but treading water. This does keep all the stars from aligning, but that will happen from time to time.
Markets can correct at any time, and these are starting to get stretched in a few places, but that doesn’t mean it is time for it to end. Many strong moves start from overbought readings and often last much longer than we expect. Pauses and corrections are part of the game, but an alignment this strong deserves the benefit of the doubt. Let your risk management take care of you if this turns out to be worn.
I hope this helps. Enjoy the rest of your weekend and we will see how it goes come Monday.
Good Luck! It is there for you to make.