Equities extend higher into the Spring, perhaps next Summer

The dual question currently rocking equity markets is to understand if the current rally extends into Q1, perhaps even into Q2/Q3 next year, and if one should rather favor Cyclical, Growth or Defensive stocks. In this short article, we review the main equity profiles against each other with proxies for Cyclical equities, Growth and Defensive ones.

Russell 2000 Index vs the S&P US Staples Sector

Weekly graph or the perspective over the next 2 to 4 quarters

The ratio of the Russell 2000 index is still rebounding vs the defensive US Staples sector. The move recently turned impulsive making it above the resistance of our C Corrective targets to the upside (right-hand scale), thereby opening the door to much higher relative targets over the next 6 to 12 months (125 – 140 range, i.e. 10 to 25% above current levels). Hence, we are probably now in a strong new uptrend, which extends into late Q1 in first instance on both our oscillator series (lower and upper rectangles), and then following some retracement into midyear/ the Summer, potentially continues higher towards 2022. This is very promising for equity markets in general.

 

Nasdaq100 Index vs the S&P US Staples Sector

Weekly graph or the perspective over the next 2 to 4 quarters

Obviously given the Nasdaq’s strong performance over the last few years, the ratio of the Nasdaq100 vs the US Staples sector is more advanced in its uptrend (i.e. our long term oscillators – lower rectangle - recently reached the Overbought zone). Yet, this uptrend doesn’t seem finished either. Indeed, as shown on our medium term oscillators (upper rectangle), we expect it to extend higher into next Spring and probably even into next Summer. Upside targets (right-hand scale) are showing some remaining upside potential although it isn’t compelling. This extension higher of Growth themes vs Defensive ones is also positive for equity markets more generally.

 

All Country World Index (ACWI ETF)

Weekly graph or the perspective over the next 2 to 4 quarters

The All Country World Index probably started a new uptrend sequence in March this year. Indeed, we view the price pattern from early 2018 into March 2000 as a completed widening triangle and subsequent sell-off. Indeed, on many other equity markets or cyclical assets, the correction from 2018, does resemble a large corrective pattern, which for many ended with a climax sell-off in March. We hence believe that we may now have entered a new secular uptrend, if not in real terms, perhaps in nominal terms. Both oscillator series (lower and upper rectangles) would suggest a continuation of the uptrend into late Q1 in first instance (lower rectangle) and perhaps  towards next Summer (upper rectangle). Each of these projections would match one of the relative graphs above. On the targets front, the upper end of our I Impulsive targets to the upside (right-hand scale) would indicate circa 10% of further upside potential over the next few quarters.

 

Russell 2000 Index vs the Nasdaq 100 Index

Daily graph or the perspective over the next 2 to 3 months

According to both oscillator series (lower and upper rectangles), the ratio of the Russell 2000 Index vs the Nasdaq 100 Index could still retrace slightly into early January and then probably continues slightly higher into February, where it could top out. We then expect it to correct down for several months into the Spring, at least. For now, the rebound since early September is still in correction mode (below the upper-end of our C Corrective targets to the upside, i.e. below 92 - right-hand scale). We believe that this resistance will probably prove hard to break above and hence most of the upside potential for now of Cyclicals vs Growth is probably behind us.

 

US10Y Treasury Yield

Daily graph or the perspective over the next 2 to 3 months

The US10Y Treasury yield started to bounce circa 1 month before the Russell 2000 vs the Nasdaq 100 index above, in early August. According to both our oscillator series (lower and upper rectangles), it may also top out slightly earlier too, towards early/mid February. Here also, the rebound is still below the upper end of our C Corrective targets to the upside (right-hand scale) and the 1.0 - 1.2% range, which serves as resistance, will probably be hard to break above. From February, we would hence expect the US10Y Treasury yield to start rolling over again, probably into the Spring in first instance. It is interesting to note that shorter term yield (e.g. US3Y) are already back close to their lows, while German Bund yields are still pretty much in a downtrend. Hence, the rebound in US long term yields is rather isolated, and in our view solely driven by rising US Inflation Expectations as these feed-back loop with a weaker US Dollar (as it happens we would also expect the US Dollar to stabilize from mid/late Q1).

 

Concluding remarks:

While both the Russell 2000 and the Nasdaq 100 seem to continue to outperform the defensive US Staples sector, respectively into late Q1 and into next Summer, the All Country World index probably also extends higher into the Spring, and perhaps even into next Summer. Cyclicals, and the Russell 2000 seem to lead into mid/late February, as US long term interest rates do push slightly higher, Growth, and the Nasdaq100, should then make a comeback.