Chart Advisor: Extending Gains – U.S. equities extend their momentum from Friday’s session, led by energy and tech.

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By J.C. Parets & All Star Charts

1/ Participation Expands for Energy

2/ Financials Over Tech

3/ High-Yield Bonds Carve Out a Relative Low

4/ USD/CAD Thrusts Lower

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1/ Participation Expands for Energy

The Global X MLP ETF (MLPA) and Oil & Gas Equipment and Services ETF (XES) are on the verge of reclaiming key levels of former support turned resistance.

While MLPA just printed multi-year highs last week, we’re watching for upside follow-through from both ETFs over the coming days. 

Source: All Star Charts, with data provided by Optuma

Whether we look at explorers and producers, oil services, or, more recently, midstream companies, participation continues to broaden among energy stocks, confirming the bullish price action and leadership from the energy sector.

2/ Financials Over Tech

Regardless of whether we’re looking up or down the market cap scale, value over growth is becoming the dominant theme. A good way to view this relationship is through the technology (XLK) vs. financials (XLF) ratio.

In the chart below, XLK is beginning to undercut its dotcom bubble highs relative to XLF.

Source: All Star Charts, with data provided by Optuma

The former 2000 highs mark an inflection point for this ratio. If we’re below this critical level, we want to be overweight value and cyclical assets, and underweight growth and tech stocks.

As this relationship is a proxy for the relative performance of growth vs. value stocks, downside follow-through would support a new secular regime in the relative trend that could favor value stocks.

3/ High-Yield Bonds Carve Out a Relative Low

The TLT/SPY and HYG/SPY ratios highlight the fact that not all bonds are created equal. While U.S. Treasurys have sold off considerably this year, high-yield bonds have more or less performed in line with the S&P 500.

Aside from highlighting the relative strength within the bond market, these ratios reveal a great deal with regard to investor positioning.

Source: All Star Charts, with data provided by Optuma

Despite falling over 20% year-to-date, the S&P 500 has held up better than Treasurys, as shown in the relative trend.

Meanwhile, high-yield bonds are beginning to catch a relative bid. This could be constructive for the overall corporate bond market.

4/ USD/CAD Thrusts Lower

The USD/CAD completed a multi-month head and shoulders reversal pattern last week, as it printed its largest single-day loss since early 2016. This is a prime example of a downside breadth thrust.

To witness such a strong move take place while price breaks down from a tight consolidation adds to the conviction of the current downside resolution.

Source: All Star Charts, with data provided by Optuma

Also, momentum has a tendency to lead price. Whether this downside thrust will kick off a significant reversal in USD/CAD remains uncertain. However, the evidence is stacking in favor of the bears.

If USD/CAD slides lower from current levels, it could be a sign of trouble for the U.S. dollar.

Originally posted 7th November, 2022

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