Chart Advisor: Semiconductor Surge

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By J.C. Parets & All Star Charts

Monday, 23rd January, 2023

1/ Semiconductors Surge Higher

2/ Consumers Favor Discretionary

3/ Mid-Caps Take the Lead

4/ The Pound Is Ready to Pounce

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1/ Semiconductors Surge Higher

Technology stocks have taken the lead this year, driving the overall market higher.

Today, the SPDR S&P Semiconductor ETF (XSD) was up roughly 2% as price printed new 10-month highs and broke through the upper bounds of a rounding bottom reversal pattern.

Source: All Star Charts, with data provided by Optuma

Seeing this economically-sensitive group make new highs is the type of behavior you would expect in an environment where investors are embracing risk, indicating that the equity market and economy at large are in good shape.

2/ Consumers Favor Discretionary

One of our favorite intermarket indicators to gauge risk appetite is the ratio of consumer discretionary stocks to their consumer staples counterparts.

As you can see, the relationship is resolving higher and completing a rounding bottom reversal that favors discretionary stocks.

Source: All Star Charts, with data provided by Optuma

Seeing this ratio make new highs has the characteristics of a bull market, as it speaks to investors positioning themselves offensively. Investors take on more risk during bull markets and less risk during bear markets. For this reason, seeing these breakouts hold could prove to be a major advantage for the bulls.

3/ Mid-Caps Take the Lead

As risk appetite returns to the equity market, we’re seeing leadership from smaller stocks accelerate. This theme is most noticeable when looking at mid-cap stocks.

Here is the S&P Mid-Cap 400 Index (MDY) making new multi-year highs relative to the broader market.

Source: All Star Charts, with data provided by Optuma

Seeing small and mid-cap stocks outperform is clearly not evidence of diminishing appetite for risk. Smaller stocks, by definition, carry excess risk. However, they also carry the potential for greater returns.

As investors become more comfortable with the idea that a new bull market cycle could be underway, it is only natural that they will position themselves in an increasingly offensive way. In other words, if they believe the market is heading higher, they want to own the assets that will go up the most. Mid-cap stocks offer a higher beta and provide investors with greater return potential. We could expect this outperformance to continue if this truly marks the beginning of a new uptrend for U.S. equities.

4/ The Pound Is Ready to Pounce

After a year dominated by dollar strength, other major global currencies are regaining lost ground. The British pound (GBP) provides an excellent example, as it retested its all-time lows versus the dollar last fall.

Fast forward to today, and the GBP/USD pair is on the verge of completing a multi-month reversal formation:

Source: All Star Charts, with data provided by Optuma

An upside resolution above last summer’s pivot highs sets the path of least resistance higher for GBP/USD. This would represent a bullish development for the pound and global risk assets alike.

If the pound is regaining lost ground against the dollar, other major currencies are likely doing the same.

For now, the U.S. Dollar Index (DXY) continues to slide back within its prior multi-year range, undercutting a critical shelf of former highs. As the long as the dollar remains under pressure, we could expect continued gains for the pound.

Originally posted 23rd January, 2023

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