Trends And Rotation

In the last article, I discussed the likelihood of rotation in the stock markets even as bigger trends continue to advance.  While the market leaders in the tech heavy Nasdaq issues held mainly firm, conspicuous strength rotated into a number of other emerging sectors.

As discussed last year, the surprising strength of the consumer economy over the past year has had beneficial effects on the consumer discretionary stocks such as homebuilders and specialty retailers.  However, some of the momentum has come off these issues over the past week.   Noticeably, the big market leaders such as AAPL, MSFT, AMZN and the like are noticeably off their highs. It’s important to note that markets usually don’t fall from their highs suddenly unless an extraordinary event takes place. We accept the notion that once long term trends are in place, they generally stay in place until trendlines weaken or turn over. As we’ve already seen of late, when prices fall down to a strong uptrend, that is usually a buying opportunity. When the trendline is flat or pointing downwards, then it is less beneficial to buy the dips. One other straw in the wind is the slow up-creep of the 10 year treasury rate, a development which must be watched carefully since any change in the rate environment will impede a market advance.

Typical of cyclical market action, smaller capitalization and speculative issues are making headlines.  The most active sectors now include the electric fuel technology space as well as various pharma issues related to vaccines.

As projected, the industrial raw material sector has been among the most powerful in the past few months with issues related to copper outperforming the overall markets.  While there’s no sign of abatement in these issues, it should be noted that prices are at the higher end of standard deviations above their moving averages, thus entry is riskier now than last August.  The black line in the chart below indicates the strong outperformance over the past half year versus the major stock indices which are now turning over. We begin to see some recovery in the long depressed energy sector as indicated by the turquoise colored line with a broad advance from long bases.  The XLE etf has virtually doubled since the lows in November.  I expect this trend to continue.

With this activity, the CRB index, a measure of a basket of goods reflecting price inflation, including oil,  has also risen from its November low.   The puzzling thing is the action of the gold market which usually moves in tandem with the CRB index.  What can we make of this?  If gold is not the haven holding for inflation worries, then is inflation a worry?  The US dollar has also had a historical correlation to gold, but inversely, that is, as the dollar declines, gold advances. Is the correlation broken….or has something else taken gold’s place as a haven holding?

A clue may lie in a sector which has jumped into prominence over the past few months after a long slumber and that is Crypto currencies.  The best known of these virtual currencies is Bitcoin, but there are many other ones that are vying for market position.  As an illustration of the growth in this sector, the chart below compares the price gains of the major market indicators versus the chart of Bitcoin over the last few months.  Clearly, money has moved into the crypto space. Favorable comments by such as Elon Musk have helped to fuel upward prices. While the stock market has been no slouch, Bitcoin and other crypto currencies have handily outpaced stocks.

There’s inadequate evidence to show that money that would have gone to gold issues has instead wound up in the crypto space, but the glaring contradiction of the CRB index versus its historical link with gold prices is quizzical. The chart below shows the clear divergence point just a few weeks ago.

While there appears to be a regression trade possible, with the spread between the two products narrowing, it looks like Crypto is an asset class that will continue to gain importance going forward.

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