Chart Advisor: New Highs for High Yield

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By J.C. Parets & All Star Charts

Thursday, 12th January, 2023

1/ New Highs for High Yield

2/ Put a Staple In It

3/ Copper Stocks Build a Base

4/ More US Dollar Weakness

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ New Highs for High Yield

Credit spreads are contracting worldwide, and emerging market high-yield bonds are breaking out. The Emerging Market High Yield Bond ETF (EMHY) is reclaiming a shelf of former highs dating back to last summer:

Source: All Star Charts, with data provided by Optuma

This key level of former resistance is also marked by the May pivot lows, creating a classic polarity zone. With fresh eight-month highs and the path of least resistance potentially pointing higher, the strength from this area of the bond market speaks to increased risk-seeking behavior worldwide.

Despite the attractive yields offered by relatively risk-free U.S. Treasurys, investors are willing to assume additional risks associated with these junk bonds.

This is a bullish development for the global bond market and risk assets more broadly.

2/ Put a Staple In It

Not only are we seeing evidence of bullish risk appetite returning to the bond market, the same is true for the equity market.

During bull markets, offensive groups and growth sectors show leadership and tend to outperform the major averages. At the same time, defensive groups such as consumer staples tend to underperform. Below is a trend chart between the Consumer Staples Sector SPDR (XLP) and S&P 500 (SPY).

Source: All Star Charts, with data provided by Optuma

As you can see, staples have shown steady leadership for over a year now. This makes sense considering the bear market that has gripped U.S. and global equity markets. If the bear market continues its course, we could expect this reversal pattern to resolve higher in favor of XLP.

However, we’re seeing the opposite occur recently. XLP/SPY has failed to hold its new highs as the ratio collapses back into its old range. A failed breakout in this ratio would make sense in an environment where equities are transitioning from a downtrend into a new uptrend. This kind of intermarket action confirms the other bullish risk appetite developments that have taken place in recent weeks.

3/ Copper Stocks Build a Base

We’ve written about the relative strength and leadership favoring metals and mining stocks in recent weeks.

Whether it’s gold, copper or steel, all are making multi-month highs as participation expands in the materials sector.

The chart below shows the Global X Copper Miners ETF (COPX) on the verge of completing an eight-year bottoming pattern relative to the broader market.

Source: All Star Charts, with data provided by Optuma

If this ratio can make a decisive upside resolution, it would be a strong data point for the bullish camp and could support the strength we’ve seen from other industrial metals stocks.

4/ More US Dollar Weakness

Yesterday we highlighted the EUR/USD currency pair, and the critical $1.08 level. If the euro is trading above that level, a dollar rally could become increasingly unlikely.

The dollar took out this critical level today and fell against other major global currencies. As such, it wasn’t surprising to see USD/JPY complete a major top at the same time.

Source: All Star Charts, with data provided by Optuma

USD/JPY has broken down to fresh seven-month lows as dollar weakness broadens.

Notice the oversold readings on the 14-day relative strength index (RSI) that accompanied the trendline violation and the downtrend that followed. These were clues, suggesting further weakness to come.

The path of least resistance could be to the downside for the second-largest component of the U.S. Dollar Index (DXY). Unless dollar bulls quickly repair the damage, global risk assets are likely to enjoy a significant tailwind.

Originally posted 12th January 2023

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