Merry Christmas and Happy Holidays!
It's been an exciting few months since I've started the blog. I am grateful for this supportive community and connecting with all of you here and on Twitter. I look forward to a new year full of opportunity, growth and more charts!
I hope everyone has a safe and peaceful holiday.
*All charts are current as of the close Tuesday, 12/22/20.
Let's delve a little bit more into bonds, stocks and commodities. My original idea was to approach each asset class through a series of singular posts. However, the market environment hasn't changed much since my last "Weekly Report," and I want to continue to focus on the bigger picture, as it was laid out in Monday's entry:
"The main point I want to express with the following charts, and over the next couple of
days, is that major trend changes are taking place. These are not short or intermediate-
term trends, but rather long-term trends. Ones that may play out for years to come, not
weeks or months."
I believe that the major asset classes are in the early stages of new trends. In hopes of not belaboring the point, I will address them together.
BONDS
Everything has been outperforming bonds since late-spring/early-summer. When we zoom out and look at the bigger picture it appears that trend is just getting started, as pointed out in a post earlier this week.
While the rest of the market has recovered and moved on from the sell-off this past spring, bonds on the other hand have remained in trading ranges that could be characterized as topping patterns.
Bonds and interest rates are the one piece of the intermarket puzzle that have not fallen into place. More consolidation might be needed, or they could breakdown tomorrow. I think the fact that the rest of the market has moved on, implying higher rates and lower bond prices, speaks volumes.
The 10yr T-Note continues to hold above support. Is there a right shoulder developing?
Support is getting an awful lot of attention in the 30yr T-Bond.
Bonds may continue to chop sideways, but it appears we have been here before. Sometimes bonds and stocks move together and sometimes they don't. The chart below gives the impression we are going through a phase of the cycle where bonds and stocks have decoupled.
STOCKS
This is as straightforward as it gets. My two-year-old can identify the underlying trend of the Dow Jones Industrial Average chart, and that trend is up and to the right.
It looks as if the DJIA based and broke out in late 2019, experienced a black swan event, and has now reclaimed new, all-time high territory.
I don't see a clear top formation over the past four years. Instead, I see a resistance zone that has been tested many times, an exogeneous shock viewed as a sell-off, and then a recovery. The stock market is getting back on track and in alignment with the primary trend, which is up.
To further press the point, the chart below shows large, mid and small-cap stock indexes all consolidating and resolving higher. These are not what market tops look like. These are what bases and continuation patterns look like, and we see them across all market cap levels.
Another key piece of information is found outside of the US. Over the last several weeks, I've been highlighting that stocks around the world have been catching a bid. The fact that this is not isolated to the US, and is a global phenomenon, is very bullish for equities.
The Global Dow is back above its 2018 highs, where global risk appetite peaked, and this bodes very well for equities around the world.
A big question going into 2021 is whether or not emerging markets will begin to outperform US equities. There is a lot of information out there that supports the thesis of bourgeoning emerging market strength, and the Dollar Index fits the bill.
It appears the USD is leading the way, while providing an environment where emerging markets can thrive. It's amazing how similar these two charts look! Notice how the DXY leads at the major turns.
But what does a weakening Dollar mean for stocks at home? It's usually not the best scenario, and is a situation that could put US stocks under pressure.
One chart that highlights the possible affects the USD could have on stocks is the Dow/Gold ratio. It tracks the DXY very closely, and suggests that a falling Dollar could lead to precious metals outperforming stocks.
COMMODITIES
Commodities are breaking out of massive bases, and kicking-off a possible bull market. The move in the CRB Commodity Continuous Index this year looks very similar to the move in 2009 off the GFC lows.
I see plenty of price memory up ahead. I will dig into that later, but for now the main point is that the breakout has been confirmed. The path of least resistance is higher.
Major bull markets in commodities are often led by Gold. Gold fired a warning shot in June 2019 when it broke out of a 6+ year base. It lead Copper's breakout by almost a year in '02-'03, and recently did the same in '19-'20.
It's also important to note the trends that ensued after those breakouts in '02 and '03. I've heard it from JC Parets many times, and I think he credits Louise Yamada, "The bigger the base, the higher in space."
The completed bases we are seeing in commodities and stocks right now is exactly what they are talking about.
Like gold and copper, grain markets are resolving higher out of some massive bases.
I'm keeping my eye on the Commodity/Bond ratio. If the ratio line stays above the grey shaded zone, then we can expect to be in an environment where money is flowing out of US treasuries and into commodities and stocks around the globe.
The US Dollar impacts the intermarket landscape in a ubiquitous fashion. There's no escaping it. I shared my outlook for the USD earlier this month in "USD Weakness Ahead."
We've already seen how Dollar weakness could affect stocks. Those impacts in stocks are partly driven by rising commodity prices. So it would make sense for shifts in the USD to be mirrored by commodities, and that's exactly what we see.
The Dollar Index led commodities in 2011 by putting in a higher low as the CRB Continuous Contract peaked. It appears the USD may have done it again this year by putting in a lower high while commodities possibly bottomed.
This is more evidence that the markets are at major turning points.
I hope the charts presented above highlight those turning points, and depict an environment where major moves are just getting started.
The new year looks to provide plenty of opportunity to grow, and I look forward to sharing that journey with all of you out there.
Merry Christmas and Happy Holidays,
Ian Culley
Thanks for reading! If you have any questions or comments, please feel free to contact me at ianculley@culleycharts.com
DISCLAIMER: All information and opinions expressed by Culley Charts are strictly that, and should not be construed as investment advice. Market participation comes with inherent risk, and the responsibility of managing this risk lies solely with each individual investor.
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