Chart Advisor: It’s Not a Party Without Chips

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By J.C. Parets & All Star Charts

Wednesday, 29th June, 2022

1/ It’s Not a Party Without Chips

2/ Growth Continues to Underperform Value

3/ Keeping an Eye on the Euro

4/ Commodities Roll as Inflation Eases

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1/It’s Not a Party Without Chips

Semiconductors are the lubricant of the modern economy, and are often used as a leading or coincident indicator for stocks more broadly.

Although they have held up better than their technology sector peers amidst the current bear market, they are now resolving lower from a distribution pattern and violating critical support levels.

Today, the SPDR S&P Semiconductor ETF (XSD) was down 2% as price pierced through the lower bounds of its range, printing fresh 52-week lows.

Source: All Star Charts, with data provided by Optuma

The fact that this cyclical, economically-sensitive group is making new lows and can’t catch a bid indicates that we could see more damage in the technology sector and equities in general.

If this week’s move holds, the bias is likely lower, and we can add semiconductor stocks to our growing list of completed tops.

2/ Growth Continues to Underperform Value

One of the most important trends over the past year has been the relationship between growth and value stocks.

The ratio has recently leaned back in favor of cyclical growth stocks, after peaking last November.

Despite an underperforming period for growth relative to value, in recent weeks we’ve seen some mean reversion to the long-run trendline.

Source: All Star Charts, with data provided by Optuma

The ratio is currently challenging a key area of former support-turned-resistance. We’re paying close attention to how prices react at this level.

If the IWF/IWD ratio reclaims the lower bounds of its prior range, we could expect some outperformance for growth stocks. However, if prices reject this resistance area, the trend could become even more pronounced in favor of value-oriented stocks for the foreseeable future.

3/ Keeping an Eye on the Euro

With risk assets under pressure, all eyes are on the direction of the U.S. dollar. There’s no better currency exchange rate to monitor for insight into the dollar than the EUR/USD currency pair, given that it comprises 57.6% of the weight of the U.S. Dollar Index (DXY)

The chart below shows that this crucial foreign exchange (FX) pair has been in a strong downtrend for nearly a year, driven by the euro’s depreciation relative to the dollar.

Source: All Star Charts, with data provided by Optuma

The trailing 8-month moving average (MA) depicts a succession of breakdowns while exhibiting bearish momentum. Bearish investors are now testing a critical level near the former 2017 lows.

If the bears manage to drive prices beyond these former lows, DXY could experience more upside, further increasing selling pressure on risk assets.

4/ Commodities Roll as Inflation Eases

Last month, we noted that inflation expectations were running into a shelf of former highs. This was a logical level for a pause, and expectations responded accordingly. As inflation expectations continue to cool, breakeven inflation rates are printing fresh multi-month lows.

The overlay chart of the 10-year breakeven inflation rate with our equal-weight commodity index highlights the implications of easing inflationary pressures.

Source: All Star Charts, with data provided by Optuma

We’ve been monitoring this relationship over recent months as most commodities have entered a correction during the spring. With new four-month lows in the books for breakeven inflation trades, commodities could be in for significant volatility over the coming weeks and months.

Originally posted 29th June, 2022

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