Dispersion

Navigator Algorithms – 97% Cash – 3% XLE

It is time for another deep dive. This weekend, I will be covering the shifting relative strength of small caps and international markets. As you can see from the chart below, we are in the early stages of these relationships turning positive (shaded areas are recessions).

The steepening yield curve, strength in oil and commodity prices, weakening dollar, and an eventual reassertion of the uptrend in gold contribute to these relative strength shifts.

In addition to the XLE, the financials (e.g., XLF), particularly banks (e.g., KBE), are poised to benefit from the steepening yield curve. The inflationary pressures also stand to support relative strength in the materials sector ETF (XLB).

The short-term problem is that we are still dealing with an overbought, euphoric market trying to pass through a 40-week cycle correction zone. I will sort through the issues over the weekend, but you can see my thought process and potential investment targets.

For now, the Nasdaq 100 led us off the bottom of the Reddit downdraft, but the breadth is narrow, and the other major indices are not confirming the recovery as yet. Man cannot live by tech alone, as I often say. Of particular concern are the lagging Dow and Transports. Another schism to be resolved over the weekend.

Morning Plan

As to the core S&P 500 index and Navigator Algorithm, the value area was unchanged yesterday, signaling that the recent higher prices are being accepted – albeit with significant breadth concerns and non-confirmation of all major indices. The gap below us remained unfilled yesterday, another sign of strength.

The market will open within the past three days’ range, with prices very close to the overnight high. Regular session sellers were muted on yesterday’s expected liquidation break, and sellers also failed to take control overnight.

So the path of least (or perhaps lesser) resistance remains higher, with the breadth caveats mentioned above. Remember, a break above the February 2nd high will be a breakout from two days of balance and could trigger a Navigator buy signal. A look above and fail would bring us back to the lows of the past few days around 3800 and potentially into the unfilled gap from there.

With cyclical down forces in place until mid-February, we are still in a caution zone for swing trading, though I will continue to take advantage of the short-term swings in the Founders Group.

Despite the generally overvalued, leveraged, and euphoric market, opportunities are everywhere beneath the surface.

Dispersion

Morning Plan

AF Thornton

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Dispersion

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