By J.C. Parets & All Star Charts
Thursday, 23rd March, 2023
1/ The Falling Yields Playbook
2/ Clues From Crypto
3/ Mixed Messages From Financials
4/ It’s Time to Give Bonds a Chance
1/ The Falling Yields Playbook
Growth vs. value ratios are pressing to new highs across the board as technology, communications, and discretionary stocks continue to show strength and resilience through the recent market volatility. Weakness from financials resulting from the recent turmoil in the banking sector has helped fuel the rally in this ratio.
The chart below shows the S&P 500 growth vs. value ratio (IVW/IVE) overlaid with the iShares 20+ Year Treasury Bond ETF (TLT):
It's not a coincidence that these charts are completing similar rounding bottom formations. Just as bond prices rise when yields fall, growth stocks tend to outperform their value counterparts in falling interest rate environments.
If these new highs in the growth vs. value relationship persist, it could be only a matter of time until TLT and other bond ETFs resolve higher from their reversal patterns. If rates move lower from here, both growth stocks and bonds could outperform.
2/ Clues From Crypto
Technology stocks and Bitcoin (BTC) are back in a leadership role.
As you can see, the technology stocks ETF (XLK) and Bitcoin are both trending higher from rounding bottom patterns. The correlation indicator in the bottom pane of the chart illustrates just how strong of a positive correlation they have.
The new highs in Bitcoin could bode well for tech stocks as XLK attempts to resolve higher from a similar base.
These charts are unlikely to resolve in opposite directions. If BTC can hold above its year-to-date and summer 2022 highs, we could expect large-cap tech stocks to do the same. It could happen sooner rather than later, as XLK just closed at its highest level since last August.
3/ Mixed Messages From Financials
With bank indexes tumbling to fresh multi-year lows, the focus remains on financials. It is uncommon to have a bull market without the participation of financial stocks, so the health of this group is paramount to the overall market.
Here is an overlay chart of the large-cap financials ETF (XLF) and small-cap financials ETF (PSCF):
Analyzing the most recent price action, we see a divergence forming as PSCF made a lower high and lower low this year, while XLF made a higher high and higher low.
Will large-cap financials catch lower and mirror the weakness we’re seeing from their small-cap peers? Based on the weight of the evidence, the odds of this could be increasing.
4/ It’s Time to Give Bonds a Chance
The Fed raised interest rates by 25 basis points (bps) yesterday, with Chair Jerome Powell suggesting a pause in the hiking cycle. This could bode well for the bond market.
The chart below shows the 7-10 Year U.S. Treasury Bond ETF (IEF):
If and when IEF reclaims the critical shelf of former lows at approximately 100, the path of least resistance could be higher.
That could be a big development for the bond market after last year’s historic selloff. A buy signal for bonds could represent a new beginning for the 60/40 portfolio.
—
Originally posted 23rd March, 2023
Disclosure: Investopedia
Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.
Disclosure: Interactive Brokers
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Investopedia and is being posted with its permission. The views expressed in this material are solely those of the author and/or Investopedia and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: ETFs
Any discussion or mention of an ETF is not to be construed as recommendation, promotion or solicitation. All investors should review and consider associated investment risks, charges and expenses of the investment company or fund prior to investing. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Bitcoin Futures
TRADING IN BITCOIN FUTURES IS ESPECIALLY RISKY AND IS ONLY FOR CLIENTS WITH A HIGH RISK TOLERANCE AND THE FINANCIAL ABILITY TO SUSTAIN LOSSES. More information about the risk of trading Bitcoin products can be found on the IBKR website. If you're new to bitcoin, or futures in general, see Introduction to Bitcoin Futures.