Chart Advisor: Analyzing the Upsurge in Developed Markets

By John Salama, CMT

1/ Bonds Drop as Yields Surge Pre-Powell

2/ Communication Hits New All Time Highs, Decline Like

3/ Developed Markets at New 52 Week High, Faces 2-3% Pullback

4/ Real Estate New 52 Week Highs, 2% Consolidation Expected

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1/

Bonds Drop as Yields Surge Pre-Powell

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Let’s begin today’s analysis with a look at TLT, the iShares 20+ Year Treasury Bond ETF, which took a significant hit Thursday, down 1.0%. This decline reflects a rise in yields, given the inverse relationship between bond prices and yields. With rates climbing just before Powell’s speech, and both gold and QQQ down 1%, it raises the question: Are markets bracing for disappointment?

Examining the one-year chart of TLT offers insights into the “Higher for Longer” interest rate narrative that has influenced markets for much of the past year. TLT reached its 52-week low of $82.42 on October 23rd, then surged to a 52-week high of $100.57 on December 28th. This indicates that yields peaked in October and bottomed out in December. During October, bonds were deeply oversold for nearly two weeks. Interestingly, a bearish divergence was observed in December when TLT hit its 52-week high; the RSI only reached 68, falling short of the overbought level of 70 and below the 74 recorded on December 15th.

The 200-day moving average (DMA), currently at $93.32, started to slope upward in mid-July for the first time all year, likely reflecting market expectations of a Federal Reserve rate cut in September, possibly by 25-50 basis points. An unusual flight to safety during the Japan crash on August 5th pushed TLT above its upper Bollinger Band for two days, a rare event for a typically low-volatility asset like TLT.

So, where does TLT stand now? I believe it will maintain support at its 200DMA of $93.32 and its 21-day exponential moving average of $96.40, suggesting it remains in accumulation mode. Over the next two weeks, I anticipate TLT to climb to $99.06, a gain of 1.5%, indicating a likely drop in rates during this period. 

2/

 Communication Hits New All Time Highs, Decline Likely

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The S&P 500 Communication Sector SPDR (XLC) reached new all-time highs on Thursday, driven primarily by its major holdings in Meta and Alphabet, which together comprise 44% of the ETF. After bottoming at $62.82 last October, much like the broader market, XLC has experienced an impressive ascent, including a week of overbought conditions in January without recording a single oversold RSI session this year. This
resilience underscores the strength of mega-cap tech within the broader market.

Despite Thursday’s record high, XLC has been largely range-bound within a broader $81-$88 range since early May. The ETF has struggled to break decisively above $88, with two failed attempts since July. Given that triple tops are uncommon in technical analysis, I anticipate a decisive breakthrough in late September. However, the recent 8.5% rally from the August 5th Japan crash low of $81.15 to $87.99 seems to be nearing its peak. I expect a modest pullback over the next three weeks, likely down to its 21-day EMA at $85.57, representing a decline of 1.5-2%.

3/

Developed Markets at New 52 Week High, Faces 2-3% Pullback

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Let’s take a global tour and examine an important segment of the market: the FTSE Developed Markets Vanguard ETF (VEA). This ETF offers exposure to nearly 4,000 companies, including major European and Canadian names such as ASML Holdings, AstraZeneca, Royal Dutch Shell, SAP, and Royal Bank of Canada, providing a well-rounded view of the developed world without the concentration risk seen in more
top-heavy indices.

Like many assets, VEA faced a challenging period last fall, briefly entering oversold territory in October before hitting its 52-week low of $41.48 on October 27th. The 200-day moving average (200 DMA), currently at $48.67, flattened for a time but has shown resilience since November 17th, consistently holding above this key level. Outside of the Japan crash week, VEA has avoided further oversold conditions, instead experiencing brief overbought periods in December, March, and May, indicating strong investor interest in European equities.

The steadily rising 200 DMA suggests that VEA is an attractive option for portfolio diversification, particularly as it includes many non-S&P 500 companies, offering a way to reduce domestic bias. Currently at a 52-week high, I believe the recent 8.5% rally from the August 5th Japan crash lows is nearing its end. A modest pullback of around 2.5% to $50.12 is expected over the next 2-3 weeks.

Additionally, today’s price action formed a bearish engulfing candle, where the day’s range has completely overshadowed yesterday’s, closing below yesterday’s low—a classic indicator of a potential short-term reversal.

4/

Real Estate New 52 Week Highs, 2% Consolidation Expected

Courtesy of barchart

The S&P 500 Real Estate Sector SPDR (XLRE) reached a new 52-week high on Thursday. Differently constructed from the Home Construction ETF (ITB) we reviewed earlier, XLRE also remains robust. This ETF, with significant holdings in Prologis, American Tower, and Equinix (accounting for 28% of its portfolio), bottomed out at $31.99 on October 30th, when the “Higher for Longer” rate environment dampened mortgage and housing market prospects.

From November through early this month, XLRE was largely range-bound between $35.50 and $40.50. It broke out above $40.50 just recently, with the 200-day moving average (currently at $38.58) gaining momentum in tandem with July’s overbought conditions. The ETF’s strong rally and favorable chart suggest positive prospects for real estate, especially as potential Federal Reserve rate cuts could make home buying more accessible.

Despite an impressive 4% rally from the August 5th lows in just 17 days, I anticipate a slight consolidation over the next three weeks. While there might be a brief spike to around $43.10 this week, a 2% pullback to $41.43, its 21-day EMA, seems more likely by mid-September.

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Originally posted 23rd August 2024

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