Welcome to the first edition of the Michael Roberts Associates Technical Corner bulletin. Each quarter for the remainder of 2021, we’ll review global market developments through the lens of technical analysis. Now, what is technical analysis? Technical analysis is the study of price action and trends within capital markets. This is performed by evaluating the economic forces of supply and demand (sellers & buyers). To learn more about the discipline, I suggest you check out the CMT association website.
So, let’s get started! We’re a few weeks into Q2 and there remains an insatiable risk appetite for US equities. The below chart outlines the S&P 500 and the percentage of stocks above their 200-day moving average. Moving averages help us not only identify trend direction, but the strength of trend as well. If a specific stock index is printing new 52-week highs, but the percentage of stocks above their respective 50 or 200-day moving average is declining – this would constitute a bearish divergence. It is signaling that although the index is forming new highs, not all of its constituents are necessarily participating in the move higher. During the recent rally in the S&P 500, the percentage of stocks that were trading above their 200-day moving average reached its highest level in over 15 years. That is one strong move!
European Banks at Resistance
Next up, we’d like to briefly touch on the MSCI Europe Financial Sector Index. European Financials are reaching a critical level around ~$20 (displayed on the chart below). The index has tested this level multiple times in the last 24 months. Many technical analysts are noting that if European banks break out above this level and resolve higher, it is difficult to be bearish on global equities. European banks are currently a very risk-on area of the market and tend to outperform during early-stage cyclical bull markets. The recent outperformance in Financials is not solely due to the tailwind from interest rates and it’s not just happening in Europe. Banks all around the world have been very strong in 2021. This is a global trend!
Do Interest Rates Need Time to Cool Off?
Thus far in 2021, benchmark yields have risen dramatically. However, to provide some perspective, they are only back to pre-pandemic levels. The recent move higher has aided sectors like US Financials and hurt areas like Technology, which are trading at much higher multiples.
We love turning to the Copper vs. Gold ratio when it comes to analyzing interest rates. The Copper vs. Gold ratio simply takes the price of copper futures and divides it by the cost of gold futures. When the ratio is moving higher, copper is outperforming, when it is moving lower, gold is outperforming. In inflationary environments i.e. when inflationary forces trump deflationary forces and the economy is booming, commodities like copper are in high demand. Thus, the price of copper can increase substantially.
Gold has a very strong inverse correlation to real yields (interest rates that account for inflation). If real yields are moving higher, it will be viewed as a headwind to gold. The only datapoints we are looking for is if the copper/gold ratio is diverging from the direction of yields. If so, this would indicate that the path of least resistance is “to be determined”. Technical analysis is not a forecasting tool. There is no crystal ball. When reviewing price charts, we take a weight of the evidence approach which aids us in developing a thesis on the broad market. Thus far in 2021, the copper vs. gold ratio is yet to diverge from US 10yr yields.
Defensive Sectors Are Worth Our Attention
With benchmark stock indices breaking out to new all-time highs, the defensive and less “flashy” sectors, specifically healthcare and consumer staples are not receiving much love. However, we believe now more than ever they deserve our time and attention. Not because we believe these areas of the market will outperform in 2021 and not because they offer the most attractive growth prospects for long-term investors - but because we find ourselves in the ~10th year of a secular bull market and these sectors offer attractive relative valuations.