US equities were lower Thursday after solid gains in the prior two sessions. Technology, REITs and Energy lagged while Utilities and Materials outperformed. Treasuries were mostly firmer with the curve flattening. The dollar was stronger vs the major crosses. Gold closed down 0.7%. WTI Crude settled down 1.1%.
The dollar is at a critical level with potentially large implications for other assets classes. Weakness would be bullish for commodities while a break to the upside would likely prolong the themes that have been in place since 2018. The Invesco DB Dollar Bullish ETF is testing / holding support at the key $26 level. The OB / OS Indicator is currently oversold while Chaikin Money Flow has recently turned bullish.
S&P futures are up 0.4% in Friday morning trading. Asian markets were mostly higher overnight though gains were moderate. European markets are mixed. Treasuries are unchanged to slightly weaker at the front end. The dollar is weaker vs the yen and the euro. Gold is up 0.3%. WTI Crude is down 0.6%.
Key Themes and Relationships
High Yield vs. Treasuries
The relationship between high yield bonds (HYG) and intermediate term treasuries (IEF) continues to trade below the 200-day moving average and test the 2016 lows from below. The RSI is in a neutral position after becoming overbought on the rally attempt. This ratio remains in a bearish trend.
Small Caps Relative to the S&P 500
The iShares Russell 2000 ETF (IWM) remains in a downtrend vs the S&P 500, below the declining 200-day moving average and remains well below broken support. The RSI is moving higher but remains in a bearish regime. We continue to favor large caps over small caps in the current environment and believe that should $300 give way for SPY, IWM is likely to decline more than the overall market.
Consumer Discretionary Relative to Consumer Staples (Equal Weight)
The ratio of consumer discretionary stocks relative to consumer staples stocks continues to trade below the declining 200-day moving average as it tests an important support / resistance zone. The RSI may be in the process of shifting to bullish ranges. Continued improvement here would be a sign that investors are willing to take on more risk, a breakdown sends the opposite message. We use the equal weight ETFs to account for AMZN’s size in the discretionary space.