Day Hagan Tech Talk: Hedge Against “Breakage,” Not Inflation
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Day Hagan Tech Talk: Hedge Against “Breakage,” Not Inflation (pdf)
Summary
While I’m not a fan of the entire Commodity complex, there are areas of improving and/or bullish absolute and/or relative chart configurations. This includes Silver and Gold.
Good for the Goose and the Gander
Peter Lynch once said, “Gold, much more so than any other commodity, is about sentiment and psychology.” I argue that this idea applies as much to the gander (Silver) as it does to the goose (Gold). Speaking of sentiment and psychology, many on Wall Street are concerned about further “breakage” due to the speed and length of the current interest rate hiking cycle. Silver has a 3-month inverse correlation of just over 80% to the direction of the U.S. Dollar Index. The U.S. Dollar Index is exhibiting poor momentum (MACD) on both a weekly and monthly basis. Therefore, the odds favor a lower U.S. Dollar leading to higher Silver.
Figure 1: Silver – with rising 40-week MA. | Bullish. As with all positions in the always-volatile commodity complex, risk management (upside and downside stop-loss points) should be identified ahead of time and followed. In this case, low-to-middle $30s on the upside is resistance/target. Initial support of $20.51 on the downside.
Narrative Around Breadth (a different perspective)
If I have seen the bullet points below one time, I have seen them a dozen times.
The narrow market leadership is another bearish talking point…
The mantra everywhere you turn is that the breadth of this rally has been poor...
Breadth has been bad narrative…
I agree with the narrative that the market is healthier when more than a handful of stocks rally. Plus, we do need to see further (a broadening of) upside participation. Yet, there was a bullish Zweig Breadth Thrust recently, which is a good start. Maybe, just maybe, considering Figures 2 and 3, we can better understand the S&P 500’s resiliency since October 2022.
Figure 2: 11 S&P Sectors & Technology heavy S&P 500 - performance since October ‘22 low. | Since the October 2022 low, all 11 sectors are higher through 4/10/23. Five of the 11 (~45%) have outperformed the S&P 500, while 6 of the 11 (~54%) have underperformed. However, 3 of the 6 (50%) that underperformed the SPX during this time still rallied by over 10%. Therefore, 8 of the 11 sectors (~73%) have rallied 10% or more since fall 2022. As a friend and former colleague (RIP Big Guy) liked to say, “not too shabby,” especially considering all the “twisting and shouting” about a narrow market.
Silicon Valley Bank imploded on Friday, March 10. However, the poor relative strength price action by the Regional Bank complex began much earlier and the actual selling in the regional bank space started days prior. Let’s look at the performance since early March of the same 11 sectors.
Figure 3: 11 S&P Sectors & Technology-heavy S&P 500. | Performance prior to the start of the Regional Bank debacle: While I am sure the underperformance of the Financials (far right, green) stands out, what I find informative is the difference in the percentage gain between Communication Services (+7.67%, red), Technology (+6.04%, blue), Utilities (+5.43%, lime), Staples (+4.11%, pink), Health Care (3.75%, teal), and the S&P 500 (+1.50%, black) within the time period.
Bottom Line: Given all that has been thrown at the domestic equity market since last fall, the SPX’s resiliency has been amazing, in my opinion. The NDR Catastrophic Stop Loss Model, which is part of our Smart Sector Global Balance Portfolio Strategy, has been fully invested since last November and on the right side of the trend of its S&P 500 benchmark.
The Day Hagan/Ned Davis Research Smart Sector strategies utilize measures of price, valuation, economic trends, monetary liquidity, and market sentiment to make objective, unemotional, rational decisions about how much capital to place at risk, as well as where to place that capital. Please reach out for specifics.
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Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 4.10.2023. Chart and table source: Stockcharts.com unless otherwise noted.
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