Weekly Size and Style Update Video (7:06)

Weekly Asset Class Group Score Update Video (4:13)

The pullback in equities has had a much higher impact on the cap-weighted S&P 500 Index (SPX) than its equal-weighted counterpart. The Invesco S&P 500 Equal Weight ETF (RSP) is still a relative strength laggard compared to SPY, but the fact that it held up better than SPY should be noted. RSP saw its fund score drop back below the 3.0 threshold as it has oscillated around this score for months. However, RSP remains on two consecutive buy signals on its default chart and is trading near an area of major support. Right now, RSP is charting at $164 which was its prior all-time high from 2022 and support from April at $160. This is a key area for the equal-weight representative to hold and keep the recent improvement in breadth going strong. A failure to hold this area would be a significant negative development for the market.

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The crypto space fell over the last seven days as risk on assets took a back seat as fear entered the market. While recent action has seen prices perk back up (in both crypto and domestic equity areas like technology), the resulting price deterioration has already done plenty of damage. Several coins within the Nasdaq Crypto Index (.NCI) fell to sell signals and violated notable support on their default charts. Previous editions have emphasized the need for caution within the space as all-time highs proved more difficult to crack for ($BTC) and other coins in general. The story remains the same this week- while it may be tempting to play a “If you liked it at $65,000, you’ll love it at $50,000” game with Bitcoin, even the most diehard crypto enthusiasts may struggle to find a silver lining for the crypto king around current levels. With a string of now three consecutive sell signals on its default chart, the technical picture remains waiting on the sideline now until further confirmation of strength is seen.

The table below explores other swift declines in the Bitcoin space (dating back to 2015), defined by the coin moving lower by 19% or more in a rolling calendar week. Besides this week, such declines have occurred a total of 20 times. At first glance, average forward returns are strong seeing Bitcoin move nearly 35% higher on average. So is that all? Should we allow history to guide us to an attack on those all-time highs up above $71,000? A second, more detailed view of the same data offers a different perspective. Median returns, which exclude larger outliers, most notably show negative three-month metrics and comparatively worse returns across other timetables. The point is that such steep declines might be more indicative of a slowdown than an initial glance may suggest. While large outliers are certainly present, more “normal” returns echo the idea that some more downside action could be in order for crypto. 

Each week the analysts at NDW review and comment on all major asset classes in the global markets. Shown below is the summary or snapshot of the primary technical indicators we follow for multiple areas. Should there be changes mid-week we will certainly bring these to your attention via the report.

Check out this week's Major Index and DALI Overview (4:01).

Since the beginning of June, International Equities and Commodities have jockeyed for the 2nd and 3rd positions within the DALI Asset Class Rankings, changing places a total of six times. Since the beginning of August, the two asset classes have swapped places three times. The downside seen in the international and domestic equity space, along with commodities, and the upside within fixed income and currencies have led to some changes under the hood of DALI.

While international equities and commodities have jockeyed for position in the asset class rankings, they’ve lost 11 and 12 tally signals within the past week with the bottom-ranking three asset classes – cash, currencies, and fixed income – all gaining tally signals. This means that laggards, or relatively weak asset class proxies, have taken signals from leadership. As the charts below will show, the weakness shown within international equities and commodities has come against the lower ranked asset classes. It is also intriguing to see where within the laggard asset classes are increasing the most in near-term strength. 

Within commodities, while there was some broader weakness shown, much of the loss in tally signals was due to a loss of strength within crude oil relative to fixed income and currency proxies. The first RS chart below shows the iShares Barclays 7-10 Year Treasury Bond ETF IEF against the Invesco DB Oil Fund DBO on a 3.25% scale chart. Action at the beginning of last week brought the RS chart back into a column of Xs before Friday’s action led to the RS buy signal, favoring IEF over DBO. Prior to this recent signal flip, the long-term strength had been with DBO since July of last year.

The second chart compares the Invesco DB Oil Fund DBO against the NDW Proprietary Currency Index on a 3.25% scale RS chart. Bear in mind that the Currency Index is an equally weighted index representing the broader currency market. The RS chart reversed into Os following last Friday’s action before giving an RS sell signal after Tuesday’s trading and favoring the Currency Index in both the near and long term.

Along with oil, broader energy commodities lost tally signals and were the primary culprits for the broader asset class’s weakness. Agriculture and base metal proxies also shed a signal or two against fixed income and currency proxies recently, so we will continue to monitor for further developments.

Within international equities, the primary culprit for weakness in the asset class was Latin America. While there was some very near-term weakness within various areas of the asset class, much of that weakness was shown through reversals into Os on RS charts. But from a long-term perspective, recent action tipped the scales for asset class relationships involving Latin America, putting those RS charts on sell signals and placing Latin America in unfavored status against proxies from cash, currencies, and fixed income.

The RS chart below compares the iShares S&P Latin America 40 ETF ILF against the SPDR Bloomberg 1-3 Month T-Bill ETF BIL on a 3.25% scale. Bear in mind that BIL can be considered both a fixed income and cash proxy due to the short-term nature of the fund. Action in early June led the RS chart to reverse into Os before the recent downside brought the chart to an RS Sell signal. Prior to the recent signal flip, the chart had favored ILF in the long-term since October 2022.

Broadly speaking, currencies saw the largest increase in tally signals over the past week, but as noted, this past week’s action not only led to long-term RS changes but also short-term ones as well. Those reversals into either Xs or Os on the asset class proxies' RS charts within DALI over the past week, which indicate near-term strength or weakness, were more prevalent than long-term changes. It will be worth checking in on DALI frequently over the near-term for further potential decreases in international equities and commodities along with potential increases in laggard assets like fixed income, currencies, and cash. To stay abreast to potential changes to the asset classes, as well as asset class emphasis, click the "Set Alerts" button in the upper right-hand corner of the DALI Overview page (Asset Allocation > D.A.L.I.).

U.S. Sector Updates

The past week saw no significant technical developments in the Industrial, Basic Materials, Consumer Staples, or Healthcare Sectors. Those that saw noteworthy movement are included below, in order of their relative strength ranking in the DALI domestic equity sector rankings. Sector designations are based on DALI sector rankings and are as follows: 1 - 3 overweight, 4 - 7 equal weight, and 8 - 11 underweight.

Weekly International Rundown Video (5:08)

Japan took the brunt of headlines across international equities over the past week as currency fluctuations produced wild swings in equity prices. On Wednesday last week (7/31), the Bank of Japan raised its policy interest rate to a 0.25% target and paired that decision with commentary about how increasing its interest rate could stimulate economic growth by appreciating the Japanese yen (source: wsj.com). Two days later (8/2), US investors were met with surprising unemployment data that fueled concerns about a heightened possibility of a sharper decline in US interest rates.

The timing of these two events produced an outsized move in currency markets as investors unwound carry trades alongside the sell-off in risk assets. A carry trade refers to an investor borrowing in a currency with low interest rates, like the Japanese yen, and reinvesting capital in higher yielding assets elsewhere, like the US (source: cnbc.com). Shifting expectations for rising rates in Japan and lower rates in the US seemingly created a one-two punch to the foreign exchange market that produced extreme movement.

This was evident in the default chart of the US Dollar – Japanese Yen cross rate USDJPY, which depicts how many Yen are needed per US dollar. This chart reached a multi-decade high of 161 in June, before beginning to move lower in July. The action over the past week culminated in a move down to 142 on Monday, leading the chart into deeply oversold territory. Tuesday saw a slight depreciation of the Yen relative to the USD, but we still sit in oversold territory near 146 at the time of this writing Wednesday. The decline did move the relationship back into a negative trend (on default 0.5% chart), favoring further appreciation of the Yen, but we do see further support near the 140 level from the end of 2023.

This is not the first time in recent years that we have seen sharp appreciation from the Yen. Back in 2022, the USDJPY chart experienced a steep upside move from around 115 all the way to around 152 by October. The final two months of that year then saw the trend reverse lower as the Yen appreciated to around 127 in January 2023.

Japanese equity prices have experienced extreme movement over the past week, but we may be able to take some notes from prior swings as an indication of what to look for throughout the next several weeks. Back in 2022, the iShares MSCI Japan ETF EWJ experienced a consistent decline that resulted in seven consecutive sell signals by October. As the USDJPY chart reached a “rally” high, we saw EWJ find a bottom at $48 and advance throughout the next several months to move back to a positive trend by May 2023 at 60. EWJ then continued to stair-step higher over the past year before consolidating in the upper $60s to low $70s throughout the last few months. The heightened volatility over the past week led EWJ to break through near-term support before testing its positive trend line at $61. That test held, and the fund reversed back up into Xs Wednesday to $65. EWJ has seen its technical picture deteriorate as it now has a sub-optimal 1.68 fund score paired with a -3.11 score direction. We would need to see more consistent improvement than just a bounce from oversold territory to consider it suitable for long investors. However, further appreciation from the Yen could help Japanese stocks reach a more favorable technical posture over the next few months. Current overhead resistance is not seen until $71 and $72, at the highs from earlier this year. Alternatively, the negative technical picture for EWJ would see further confirmation with a potential transition to a negative trend at $60.

Weekly Fixed Income Update Video (5:43)

US Treasury yields dropped sharply over the last week following the weaker-than-expected jobs report. The US Treasury 10-year Yield Index (TNX) fell to 3.7%, its lowest level in a year. The core US market has continued to improve with the decline in yields. The US Government-Long group has crossed above the 3.0 score threshold and the US Fixed Income Long Duration group is on the verge of doing so. Meanwhile, the inverse fixed income group now ranks last out of all fixed income groups and 131st out of all 134 groups in the system.

Bets for more aggressive cutting from the Fed have increased. Fed futures are now pricing in nearly a 65% chance of a 50 bps cut at the September meeting; the odds of a 50 bps cut are up significantly from a week ago when the market was pricing in an 88% chance of a 25 bps cut.

Image Source: CME Group

The two-year/10-year spread is now the least inverted it has been since mid-2022 and it could turn positive in the short-term. Inversion of the yield curve is widely discussed as a sign of economic downturn, but historically, recessions have happened more closely in time to when the two/10 spread normalized than when it inverted. It has been argued that, in this case, disinversion is a sign of a modest slowing, i.e., the Fed’s plan for a “soft landing” is working. We won’t know for some time which scenario – soft landing or recession – is correct. But, if the curve does normalize, it could add to the growth concerns that have emerged recently.

Image source: Bloomberg

Remember, these are technical comments only. Just as you must be aware of fundamental data for the stocks we recommend based on technical criteria in the report, so too must you be aware of important data regarding delivery, market moving government releases, and other factors that may influence commodity pricing. We try to limit our technical comments to the most actively traded contracts in advance of delivery, but some contracts trade actively right up to delivery while others taper off well in advance. Be sure you check your dates before trading these contracts. For questions regarding this section or additional coverage of commodities email will.gibson@nasdaq.com.

Data represented in the table below is through 8/6/2024:

Broad Market Commodities Report

Portfolio View - Commodity Indices

When we last discussed copper it was severely underperforming gold, contributing to a key relative strength signal change. Since then, the base metal has continued lower (which makes sense given the direction of interest rates) and now tests a key level of support.

Over the past month copper continuous (HG/) has lost nearly 14%, culminating in five consecutive Point & Figure sell signals on the default chart. Interestingly, that is the most consecutive sell signals we have seen since July 2022…which was a near-term bottom. The current oversold (OBOS) reading and state of the futures curve are also supportive of a bounce.

As of yesterday’s close, HG/ sported a -84% oversold reading which was the most negative we had seen since July 2022 (too). Additionally, the copper futures curve is in steep contango which means future prices are sharply higher than the spot price. For what it’s worth, the copper futures curve is presently much steeper than other metals.

To bring home today’s discussion notice the positive trend line test on the copper continuous long-term chart below. This trend line was established in March of this year, so a break beneath would certainly be notable. (CPER too is testing its positive trend line.) Further support for HG/ is offered at around $3.60.

Daily Option Ideas for August 7, 2024