Chart Advisor: Not All Indexes Are Created Equal – The gap between the Dow and other large-cap benchmarks continues to widen.

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By J.C. Parets & All Star Charts

Tuesday, 22nd November, 2022

1/ Not All Indexes Are Created Equal

2/ Will Rates Roll with the Dollar?

3/ Weak Dollar Implications

4/ International Improvement

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1/ Not All Indexes Are Created Equal

The disparity in performance between the blue-chip Dow Jones Industrial Average (DJIA) and other large-cap benchmarks continues to grow. The gap is most notable when we compare it with the tech-heavy Nasdaq 100.

The charts below highlight both indexes with Fibonacci retracement levels drawn based on their maximum year-to-date drawdowns.

Source: All Star Charts, with data provided by Optuma

The Dow has rallied roughly 20% off its October lows and retraced over 62% of its maximum drawdown. The index is now approaching its August highs.

Contrast this with the Nasdaq, which remains just 11% above its October lows, representing a roughly 20% retracement. As such, the index remains far from its summer highs. Just as not all stocks are created equal, the same is true for the indexes.

2/ Will Rates Roll with the Dollar?

With the U.S. dollar rolling over, all eyes are on yields to see if they will follow to the downside.

While the dollar has already broken below a multi-month trendline and completed a short-term topping pattern, the same is not yet the case for most yields.

Source: All Star Charts, with data provided by Optuma

With both moving together in lockstep for nearly a year now, we’re watching yields closely to see if they’ll catch lower with the dollar. The first step in that direction could be a similar trendline violation. 

As you can see in the chart above, the five-year yield has already violated its trendline. We’re watching the rest of the yield curve for potential confirmation.

3/ Weak Dollar Implications

The negative correlation between the U.S. dollar and the stock market has been as strong as ever, particularly over the past year.

In recent years, stock rallies have often coincided with a depreciating dollar. Conversely, when stocks have struggled, the dollar has tended to appreciate.

Source: All Star Charts, with data provided by Optuma

As shown in the above chart, the U.S. Dollar Index (DXY) stopped rallying roughly six weeks ago. As a result, stocks have enjoyed a decent run ever since.

As long as DXY continues to roll over, equities and risk assets could continue to benefit.

4/ International Improvement

When it comes to global equities, we’re starting to see some improvements in diversified indexes and ETFs.

The chart of the Global Dow Index shows buyers stepping in and defending the prior-cycle highs last month, with the ensuing rally sending prices back above their June lows. The next key level to the upside could be the August highs. 

Source: All Star Charts, with data provided by Optuma

Whether you look at Europe, Asia, or emerging markets, the significance of these levels is the same and could set the tone for the market’s next move. Now that most indexes are above their early summer lows, bulls would like to see more of them start to reclaim their August highs.

Originally posted 22nd November, 2022

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