Market Overview
It was one of the most tense weeks in markets in months. Despite all the noise, stocks finished higher across the board, with the Nasdaq leading to the upside. The tech-heavy index closed up 2.14%, while the S&P 500 finished up 1.70% and the Dow Jones Industrial Average was up 1.56%.
Precious metals hit new record highs, but odds are mounting that the blow-off top is complete. Meanwhile, there appears to be a tremendous dip-buying opportunity in crypto. There was a lot of fuss about volatility, but it could have corresponded to a complete momentum and sentiment reset. Get ready for some real fireworks.
Stocks I Like
Cloudflare remains by far the top-performing sector going back to the April lows. In fact, the only real change from last week is that real estate (XLRE) overtook energy (XLE) in terms of performance since April. This shift signals that rates are going lower.
If anything, lower rates should serve as a tailwind for the tech sector (XLK) and consumer discretionary (XLY). All of this price action seems like a giant rotation, which can be very painful for those who are overleveraged.
Editor’s Note: Real estate popping into the one-week leader signals that lower rates are on the horizon.
Do We Need the Power or the Tech More? (Sector ETF: XLU / XLK)
Power and nuclear stocks have become the talk of the trading town in recent weeks, as the utilities sector (XLU) is neck and neck with the tech sector (XLK) in terms of year-to-date outperformance. The consequences of this dynamic are profound because utilities outperforming often signals that downside risks are creeping into the market.
At least, this was the traditional interpretation of this money flow. Could it have evolved to adapt to the modern AI economy? It’s a conversation worth having.
Fortunately for bulls, the trend in this ratio still favors technology (XLK), as seen by the series of lower lows and lower highs. As long as this ratio stays below the downward sloping trendline, the preference remains for tech over utilities.
Commodities Still Asleep (Sector ETF: DBC / SPY)
With more rate cuts coming, it’s more important than ever to keep a close watch on the commodities sector (DBC), especially compared against the S&P 500 (SPY). This is a key ratio to monitor when it comes to inflationary momentum.
When DBC is outperforming SPY and the ratio is rising, it means inflationary pressures are accelerating upwards. You can still have inflation when this ratio is falling, but it won’t be accelerating. This is exactly the situation we’ve seen lately—disinflation.
When inflation is present but not accelerating, stocks provide the best refuge to protect and even grow your wealth. However, when inflation starts running hot again, stocks turn volatile and it becomes important to hide in commodities.
Liquidity Set to Improve Even More (Sector ETF: LQD / IEI)
Fed Chair Powell gave us a big signal last week when he said the end of Quantitative Tightening (QT) was here. Bond markets have been holding up well, and it’s important to remember that the first rate cut technically happened in the summer of 2024.
It’s time to check back in on the ratio between investment-grade corporate debt (LQD) and 3-7 Year Treasuries (IEI). We want to see LQD outperforming IEI, as it signals markets are willing to avoid the “safety” of Treasuries and reward risk-taking.
I’ve been tracking the rounding bottom formation in this chart for a couple of years now. The fact that it has persisted so long suggests a monumental move will come from this breakout. We just need to close above the upper horizontal trendline acting as resistance.
My Take: When liquidity conditions improve, big market crashes are unlikely. Yes, quick, sharp reversals may occur but they often don’t last; declines tend to be slow and drawn out. This is why I’m excited about the recent volatility—it shook out excess leverage, reset sentiment, and now we’re seeing the right leadership emerge from this low. Seasonality looks to start taking over soon, which should be bullish.
Cryptocurrency
It’s time to have another look at Ethereum. It’s surprising that this cryptocurrency has been correcting from its all-time high for the past two months. Prices dropped to a multi-month low a couple of weeks ago but held support nicely in the 3300-3400 zone. Prices are now back in the 4000-4200 zone.
This zone represents near-term resistance, but the more Ethereum tests it, the more likely a breakout becomes. Despite the lower lows and lower highs over recent months, I’m particularly keen on Ethereum holding above the August 3 low at 3355.
I’m eyeing the descending price channel setup on Ethereum’s chart. This is a continuation pattern, and if we see a rally above the upper trendline of the channel, it would signal the start of a rally up to 5700-5800.
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