It’s been quite a week, but the S&P 500 closed last week up 3.56%. This despite investors having begun the week confronting threats by President Trump that ‘a whole civilization [would] die” by Tuesday evening. Whether it’s in spite of that or because of it, what we have for now is a tentative ceasefire that seems to have given all of us a bit more hope that a peaceful resolution might be on the horizon.
For investors who have been asking, “Is the bottom in?” Fundstrat Head of Research Tom Lee sees a strong likelihood that it is. He actually saw signs of that from last week, when equities deviated from their traditional relationship with oil prices.
As you might know, there is an inverse correlation between equities and oil prices: equities tend to fall when oil prices rise (and vice versa.) That’s mostly held true during the latest Iran conflict and the subsequent surge in oil. Yet at the end of March, this changed: In Lee’s view, the fact that “a continued rise in oil wasn’t causing equities to fall further” (both rose at the same time) suggested that stocks had bottomed on the weeks of bad news. A second signal further supports Lee’s view. We discuss that in our Chart of the Week below.
As for Head of Technical Strategy Mark Newton, he’s inclined to agree, for different reasons. Last week saw technology breaking out relative to equal-weighted S&P 500 (RSPT 0.58% vs. RSP -0.46% ), signaling a possible period of outperformance for technology. “This is quite bullish for U.S. stocks,” Newton told us, and strictly based on technical analysis, “I am expecting SPX to push back to new all-time highs in the months to come.”
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Chart of the Week
The VIX, which showed volatility rising as high as 28 on Tuesday, closed below 20 on Thursday. To Lee, this is a sign that investors’ attempts to seek risk protection have peaked. As is often the case, Lee and his team looked to historical precedent for clues about what might lie ahead. They found that since 1990, there have been four instances that are similar to our current scenario: a VIX close above 30 (as it did on March 27 and March 30), followed by a decline to below 20 and a concurrent a fall in oil prices of 15% or more. The median forward gains one month, three months, and six months later were 1.3%, 2.6%, and 9.2%, respectively. As our Chart of the Week, the median six-month forward gain implies the possibility of S&P 500 reaching 7,438 in October.
In my view the White House needs an exit strategy from the President’s harsh rhetoric of the past few days and the Pakistani cease fire proposal may be the right idea at the right time. The offer includes a provision that Iran opens the Strait of Hormuz during the two-week cease fire. Iran says it is positively looking at the proposal, and the White House has said the President has seen it and will respond. In my view most positive development in several days.
KWEB looks preferable to FXI as a way to play Chinese Equities recovering. Interestingly enough, but not surprising given its Tech exposure, DeMark-based exhaustion signals are now showing counter-trend exhaustion “13 Countdown” signals (“Buys” ) on the ratio of KWEB -0.31% vs. FXI 0.06% for the first time since last Fall’s decline got underway. (KraneShares CSI China Internet ETF – KWEB -0.31% ) vs. the Ishares China Large-cap ETF (FXI 0.06% ) which should lead to a period of snapback recovery and mean reversion in the Tech-heavy KWEB which has underperformed FXI since last Fall. Thus, KWEB looks like the better choice than FXI for those trying to play a recovery for China on a falling US Dollar. This weekly Symbolik chart shows this ratio of KWEB to FXI along with two different DeMark-based buy signals
This might be the most important chart for the US Stock market as it shows Technology breaking back out vs. Equal-weighted S&P in ratio form (RSPT -0.73% vs. RSP -0.72% ) and should coincide with Growth beginning to turn back higher vs. Value and lead to Technology beginning a period of outperformance. This is quite bullish for US stocks and i expect that an eventual strengthening in the “Magnificent 7” would be the catalyst that could lead US higher again vs. the All-country World index. For now, this weekly ratio chart shows Tech vs. SPX having exceeded a minor resistance trendline which argues for more Tech outperformance.
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