Chart Advisor: More Fuel for Energy

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By J.C. Parets & All Star Charts

Monday, 16th May, 2022

1/ More Fuel for Energy

2/ Big Test for Little Stocks

3/ Rates Meet Resistance

4/ Logical Level for Low Volatility

1/ More Fuel for Energy

The new week is being led by strength from energy stocks. Energy is the top-performer so far during Q2, was the leader in Q1, and also beat all other sectors during calendar year 2021.

Source: All Star Charts, with data provided by Optuma

When we look at large-cap energy stocks, price has been coiling at a shelf of resistance at multi-year highs since March. We think buyers may have finally absorbed the overhead supply at this level. With fresh closing highs in the books today, we’re looking for a fresh leg higher.

2/ Big Test for Little Stocks

Small-cap stocks have been the laggards. For this reason, we can look to them for an early indication of further downside. Right now, the main small-cap index, the Russell 2000 (IWM), is testing a critical level.

Source: All Star Charts, with data provided by Optuma

If price violates the 2018 and 2020 highs, we could anticipate another leg lower for this group of stocks. And if the Russell is coming under further pressure, it’s likely the S&P 500 and Nasdaq are following a similar path lower.

3/ Rates Meet Resistance

The rise in benchmark yields around the world is beginning to slow. And the U.S. 10-year Treasury yield is no different as it tests its former 2018 highs, challenging the psychological 300-basis point (bp) level.

This is a critical level for the 10-year yield, as it has capped rates since the summer of 2011. 

Source: All Star Charts, with data provided by Optuma

Considering the U.S. benchmark has climbed more than 150 bps off its January lows, a period of digestion is not only likely, but well-deserved. We could anticipate some mean reversion from bonds in the coming weeks.

4/ Logical Level for Low Volatility

Low-volatility stocks are defensive in nature. These are your staples, utilities, and other high-quality, dividend-paying names. When they are rallying on a relative basis, the broader market tends to be under pressure. 

Source: All Star Charts, with data provided by Optuma

They’ve been showing relative strength since the second half of last year now. With prices testing a key level, this could be a natural place for some consolidation. If that is the case, and this ratio enters a corrective phase, we might see some mean reversion from stocks and risk assets in general.

Originally posted on 16th May, 2022

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