Intermarket Relative Strength – NASDAQ Is Leading and Small Caps Are Lagging

Equities Outperforming Other Asset Classes

Chart 1: Intermarket

Chart 2 – Intermarket Relative Strength

U.S. Treasury Bonds ($USB) have risen since October 2018 (see Panel 1, Chart 1) after mostly declining from a high of 176.06 in June 2016 to a low of 136.40 in October 2018. It is approaching the high, 157.94, of Q3 2017. On relative basis, $USB is under-performing the equities, S&P 500, but out-performing the Dollar Index.

The U.S equities, S&P 500 ($SPX), are rising since December 2018 after a choppy twelve months (see Panel 2, Chart 1). The equities are mostly out-performing other asset classes at lest since December 2018.

The Commodities Index (Reuters/Jefferies CRB Index – $CRB) is moving, mostly, sideways – between 205.00 160.00 – since April 2016 (see Panel 3, Chart 1). In may 2018 it made a high of 206.95 and the bias since then down. $CRB is also mostly underperforming other asset classes for many months, though it is starting to out-perform the Dollar Index and Bonds since June 2019.

US Dollar ($USD) has been mostly rising since early February 2018 ( see Panel 4 Chart 1) after making a low of 88.15 after declining from a high of 103.82 in December 2016. The pace of advance has slowed down since the Q4 of 2018. On relative basis, the Dollar Index is mostly under-performing other asset classes (see Chart 2).

Influence on Investment Decisions

The current relative strength sequence is S&P 500 followed by Bonds, Commodities and the Dollar Index. The equities are recommended to be over-weighted, bonds under-weight and should be used for hedging. Commodities are recommended to be underweight.

Large Caps and Tech Leading Small Caps

 Chart 3 РU.S. Major Indices

Chart 4 – Relative Strength (1)

Chart 5 – Relative Strength (2)

Major U.S. indices have risen since early 2009 with few retracements and sideways move (Chart 3). The last rally started in December 2018 after indices underwent a choppy twelve months. Unlike the large cap and tech indices, the small caps, Russell 2000 (see Panel 4, Chart 3) and Dow Jones Transportation Average (see Panel 5, Chart 3), are mostly moving sideways in a congestion zone for the past few months.

The relative strength of major indices give us more insight.

S&P 500 ($SPX) and Dow Jones Industrial Average ($INDU) are providing same returns since April 2019 similar to the period between November to March (See Panel 1, Chart 4).  S&P 500 is underperforming NASDAQ Composite ($COMPQ) since November 2018 (see Panel 2, Chart 4). it is out-performing Russell 2000 (see Panel 3, Chart 4) and Dow Jones Transportation Average (see Panel 4, Chart 4).

Dow Jones Industrial Average is also underperforming NASDAQ after briefly outperforming from May to June (see Panel 5, Chart 4). It outperforming the small caps, Russell 2000 (see Panel 1, Chart 5) and Dow Jones Transportation Average (see Panel 2, Chart 5).

NASDAQ Composite ($COMPQ) is outperforming all of them (See Chart 4 & 5). The performance on Russell 200 ($RUT) and Dow Jones Transportation Average ($TRAN) is almost equal (see Panel 5, Chart 5).

Influence on Investment Decisions

At the moment, NASDAQ Composite is showing the most strength, though only marginally more than S&P 500 and Dow Jones Industrial Average. These should be give equal-weightage. Russell 2000 and Dow Jones Industrial Average should be underweighted.





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