Small cap equities have had a fantastic run since the beginning of 2019, so much so that the asset class is up 12.72% year-to-date. However, the asset class has been loosing a little bit of luster as of late, especially in relation to their large cap counterparts.
After a strong rally in early 2019, commodities seem to have taken a breather in recent sessions.
From a quick look at the US Bonds (LQD as a proxy) and US Equities (SPY as proxy) price ratio, it seems like money is moving slowing moving back into bonds at the moment. This is most likely due to the poor global economic data that has come out in recent weeks.
Time will tell as to whether or not this trend continues. But for now, bonds seem to be the asset of investors’ choice.
After peaking in late December 2018, the price ratio between 7-10 year US Treasuries (IEF as proxy)(numerator) and US Stocks (SPY as Proxy)(denominator) has fallen since then. This is backed up by the fact that the US Treasuries/US Stock ratio fell below its 10 day EMA (Green) and failed to move higher.
We believe that this indicates that “Risk-On” sentiment is back in the financial markets, in the interim, as investors flock out of safe havens and into risky assets such as equities. It must be noted however that the overall macroeconomic backdrop is still quite challenging, as geopolitical risk in various regions continues, and global economic indicators trend downward.
Nonetheless, we believe there are some short-term opportunities in equities on a sectoral basis. Air Services, Recreational Vehicles, Southeast Regional and Pacific-focused banks, and Auto Part Manufacturers and Wholesalers present opportunities for investors in the near term.
With the recent upswing in the markets, the short-term technicals point to the Dow Jones trying to retest 25,000 level. Look for short-term opportunity in equities in oversold stocks and sectors up until this level.
As the markets move into 2019, it appears that gold (GLD) is beginning to get its luster back.
Gold prices have risen since bottom in early October, as market volatility and macro issues continues to plague the financial markets.
With strong technical patterns also confirming investors' bullish sentiment on the commodity, our 3 month price target for GLD is at $126.11
After the formation of a solid "Inverse Head and Shoulders", the price ratio between Gold (GLD as proxy)(numerator) and US Stocks ( SPY as Proxy)(denominator) took off past the neckline of 0.39 in early December. A Golden Cross is beginning to form among the 50/200 Day EMA, which in turn further supports the trend.
This indicates that money is flowing into Gold, as a safe haven, as equities and other risk assets move further to the downside.
Looks like weakness is beginning to show up in junk bonds, which in turn, does not bode well for stocks or other risky assets.
It looks like the recent selloff is not just due to market overreaction, but more due to a shift in market sentiment to the downside.
If this persists, look for more downside in Junk and other risky assets.
To see our latest report on the global minerals and metals outlook and investment opportunities, visit our site for a copy of our latest report: Better Your Own Copper Than Another Man's Gold - Global Minerals and Metals Outlook 2018-2023
As the global economy continues to benefit from the resurgence in global growth, bond yields and interest rates have begun to rise for the first time since the Global Financial Crisis.
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