By Todd Stankiewicz CMT, CFP, ChFC
1/ Is the Market Rotating?
2/ International May be the Hidden Opportunity
3/ S&P 500 is Overbought
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1/
Is the Market Rotating?
Relative Rotation Graphs (RRG) are a great way to quickly gauge how different asset classes are performing relative to a benchmark, in this case, the Vanguard Balanced Index Fund. One key takeaway from this chart? Leadership relative to a balanced portfolio may be shifting away from stocks and Bitcoin and toward commodities.
Just like we talked about yesterday, commodities are breaking out. Could this be another sign that inflation is making a comeback? Or at the very least, does it suggest that some investors are starting to hedge against inflation with increased commodities exposure?
The takeaway for portfolios: it may be time to think about diversifying across multiple asset classes.
2/
International May be the Hidden Opportunity
Just as most investors are writing off international equities, or really, anything that isn’t a U.S. equity index, it might be time to start paying attention. The relative performance of the S&P 500 versus the MSCI EAFE Index has pushed deep into RSI overbought territory, and there’s a bearish divergence showing up.
Now, the ratio has pulled back to the Bollinger Band midline. That suggests some short-term leadership for international equities relative to U.S. markets. If this ratio breaks below the midline, we could see a real shift in market leadership, with international equities taking the lead over domestic market-cap-weighted indices.
Once again, the theme remains the same: diversification matters.
3/
S&P 500 is Overbought
The S&P 500 is still in a strong uptrend, but it’s worth noting that the Relative Strength Index (RSI) on the quarterly chart has pushed into overbought territory. At the close of 2024, the RSI reading was 75.48, well above the 70 threshold.
Historically, similar readings have preceded market sell-offs. Some of these have led to prolonged drawdowns, like the dot-com bubble burst or the financial crisis, while others, like the pandemic selloff and the 2022 pullback, were shorter-lived.
While it’s tough to predict the magnitude of any potential decline, one thing seems likely: volatility may be set to pick up from here. Keep an eye on that middle Bollinger Band level I spoke about earlier this week.
Disclaimer: Advisory Services offered through Sykon Capital, LLC, a registered investment advisor with the U.S. Securities and Exchange Commission. This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor. The information contained in this presentation has been compiled from third party sources and is believed to be reliable as of the date of this report. Past performance is not indicative of future returns and diversification neither assures a profit nor guarantees against loss in a declining market. Investments involve risk and are not guaranteed.
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Originally posted 30th January 2025
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