#$splv

Here are some of the most noteworthy highs and lows from across the markets for Friday, November 27, 2020.

The Global Dow Hitting New All-Time High

Deutsche Bank $DB Hitting 2-Year Highs

Copper Hitting 7-Year Highs

“Risk-On” High Beta/Low Volatility Ratio Hitting All-Time Highs

Nasdaq 100 Volatility Index $VXN Testing Post-Crash Lows

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3 of our favorite indicators of risk continue to signal “risk off”.

In analyzing risk in the market, we predominantly rely on quantitative models that we’ve developed over the years. However, there are other indicators that we’ve found helpful in instructing us as to the “risk-on” vs. “risk-off” situation in the market. These indicators can provide helpful clues as to the potential strength or durability of market rallies. The last time we updated them in a post was in mid-August. Our conclusion then:

“Taking stock of the combination of these 3 “risk-on/risk-off” measures, we find adequate reason for some concern. There are certainly enough positives in the market to maintain moderate long exposure to stocks. Furthermore, the broad market would appear to be setting up for a breakout to new highs. However, given the status of these risk indicators, an aggressive play on the potential breakout is probably not warranted. Furthermore, should the broad market break out, and these risk measures fail to follow along, it could be an indication of a likely failed, or temporary, breakout.”

Indeed, the broad stock market would break out to new highs in the final days of August — and immediately fail from there. The large-cap indices were able to hold up for about another month before they too failed to maintain their breakout levels. The continued deterioration in the risk indicators into those late September-early October highs further convinced us of the likely fallibility of the breakout and the weakness that would follow.

In our present case, we take stock of the 3 risk indicators once again in an attempt to determine the amount of risk remaining in the selloff and the potential for a turnaround.

High-Beta Vs. Low-Volatility (Status: RISK OFF)

One such risk-on indicator can be found in the “high-beta” area of the market – especially in its behavior relative to “low-volatility” stocks. To track these groups, we use the Invesco S&P 500 High Beta ETF (SPHB) and the Invesco S&P 500 Low Volatility ETF (SPLV). We have found that typically when the ratio of SPHB to SPLV performance is rising (e.g., 2012-2015, 2016-2018), it is an indication of “risk-on” – and constructive for the prospects of the overall market. When the ratio turns lower (e.g., 2011, 2015-2016), we’ve found the opposite message to be true, i.e., “risk-off”. This chart illustrates that idea.

Back in August, we first noticed the developing breakdown in the SPHB:SPLV ratio, and the potentially negative implications for the market. The ratio would continue to lead the stock market decline lower into the late October correction low.

So what is it signaling now? After a temporary bounce off of the October low, the ratio is once gain setting new correction — and multi-year — lows. Those hoping to see an imminent end to the correction would rather have the ratio positively diverging vs. its October low to indicate a decreasing risk situation. However, the fact that the ratio is again dropping to new lows is a sign of continued elevated risk in the market.

Small-Cap Pure Value (Status: RISK OFF)

When it comes to market “styles” (e.g., small, mid, large-cap and growth vs. value), the small-cap pure value style traditionally has the highest beta. And like the “high-beta” stock segment mentioned above, the S&P 600 Small-Cap Pure Value Index (SPSPV) typically leads the way in a legitimate risk-on market rally — and lower in a risk-off move. For example, the SPSPV led the way higher during the beginning of rallies starting in January and November 2016, August 2017 and February of this year. We have seen the opposite situation since August.

In our August post, we noted preliminary signs that the SPSPV was beginning to lag badly behind most of the other style segments. As it happens, the index would top out within days and begin a steady descent, even as the large-caps made a series of further new highs. This was another red flag for us regarding risk. Obviously, in hindsight, the caution was warranted as a broad market correction unfolded.

So what about now? One of the best signs that stocks were not “off to the races” following the late October low was the anemic bounce in the SPSPV as it failed to retrace even 38.2% of the initial correction decline. And presently, we find little reason to believe that risk has been adequately wrung out of the market in the near-term. That’s because the SPSPV was one of the first indices to actually eclipse the initial October correction low yesterday. When risk levels are finally appropriate for stocks to form a low and begin rallying on a more durable basis again, look for this index to display more resilience than this.

High Yield Bonds (Status: RISK OFF)

The last indicator we’ll look at is the high yield bond market. We are certainly not the only ones to look to the high yield bond market, appropriately in our view, for clues on risk appetite. As high yield represents the riskiest of all bonds, the space actually trades in concert with equities much of the time. Thus, when high yield bonds are rallying, it is indicative of risk-taking, which generally includes a rallying stock market. When the high yield space turns down, it can be a sign of risk aversion — and a cautionary sign for stocks.

In August, we noted that the iShares High Yield Corporate Bond ETF (HYG) was running into some potential resistance on its chart (on an unadjusted basis). Indeed, the fund would be within 0.25% of its eventual rally high. Its behavior following would raise alarm bells as the HYG dropped to a new 52-week low at the initial correction low in late October.

Things have not improved since. The fund undercut its October low a week ago and has been declining since. It is now trading at multi-year lows. That is not indicative of a situation whereby risk has adequately been wrung out of the market and investors can begin aggressively buying back in.

Aggregate Conclusion: RISK OFF

While the stock market correction has certainly wrung out some of the excess risk that we were warning about in late summer, it does not appear to be enough to yet lay the foundation for an intermediate-term low and a new durable rally. The status of the 3 key risk indicators above each indicate a continued elevated level of risk in the stock market at this time. Therefore, our focus would not yet be on significantly increasing equity exposure in anticipation of an impending successful re-test of the October low. Rather, we will continue to be more focused in the near-term on reducing exposure, or hedging into any near-term market strength.

For updates on these risk indicators as well as market levels, timing and investment selection, continue to monitor our Daily Strategy Session videos.

If you are interested in an “all-access” pass to our research and investment moves, we invite you to further check out The Lyons Share. FYI, we are currently holding our BLACK FRIDAY SALE — our BIGGEST SALE OF THE YEAR. So considering the discounted cost and the current treacherous market climate, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

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High Beta stocks may be losing their key leadership status.

In analyzing risk in the market, we predominantly rely on quantitative models that we’ve developed over the years. There are, however, other indicators that we monitor which we’ve found helpful in instructing us as to the “risk-on” vs. “risk-off” situation in the market. These indicators can provide helpful clues as to the potential strength or durability of market rallies. One such risk-on indicator can be found in the “high-beta” area of the market -- especially in its behavior relative to “low-volatility” stocks.

To track these groups, we use the Invesco S&P 500 High Beta ETF (SPHB) and the Invesco S&P 500 Low Volatility ETF (SPLV). We have found that typically when the ratio of SPHB to SPLV performance is rising (e.g., 2012-2015, 2016-2018), it is an indication of “risk-on” -- and constructive for the prospects of the overall market. When the ratio turns lower (e.g., 2011, 2015-2016), we’ve found the opposite message to be true, i.e., “risk-off”. This chart illustrates that idea.

What’s the current message being sent by the ratio? As one can see on the right of the chart, the SPHB:SPLV ratio is threatening to break its post-2016 uptrend. While it’s too soon to decisively reach that conclusion, we would argue that such a development would be a negative for the prospects of a continued, durable risk-on move in the stock market.

In a Premium Post at The Lyons Share, we review the current status of our set of risk-on/risk-off indicators to reach a more comprehensive picture of the market’s risk situation.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

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The following post originally appeared as a premium article on The Lyons Share on March 7, 2017.

A trio of metrics that normally fare well in good markets are faltering; but how serious is it?

We’ve been talking about a few sneaky barometers of “risk on/risk off” markets for a few weeks now. To clarify, stocks typically rally, and on firm footing, when these metrics are favorable as they indicate the willingness of investors to take on risk. And when they are fading, stocks tend to suffer, or are at least more vulnerable to weakness, as investors shy away from risk-taking. We have been discussing some of these risk on/off barometers lately (mainly in our daily strategy videos) because they have been threatening to switch to the “off” position. Action in the past few days has cemented that notion. Let’s take a look at the 3.

Small-Cap Pure Value Stocks

The first is the S&P Small-Cap Pure Value Index (SPSPV). As we have discussed, this index typically has the highest beta of any of the market cap style categories. Therefore, during favorable markets, such as the initial post-election rally, the SPSPV will generally lead as it did in November — to the tune of about 30% in a month. Since topping in December, however, the index has been pulling back, indicating perhaps a less-sustainable rally in stocks over the past few months.

As we mentioned in a post on February 1, the SPSPV had pulled back enough that it was testing what we viewed as a significant confluence of support, including:

The post-2009 bull market Up trendline that served as support until mid-2015 – and perhaps again after reclaiming it in the immediate aftermath of the election.

The 23.6% Fibonacci Retracement of the January-December 2016 rally

The 38.2% Fibonacci Retracement of the November-December 2016 post-election rally

The 61.8% Fibonacci Retracement of the rally from the post-election breakout

A bounce off that area would perhaps spur a new sustainable up-leg in the post-election rally; while a break of the level may signal a broader risk-off signal for the overall market. Well, it did bounce precisely off of that support but has struggled to make any upside progress over the past month. Thus, as the market softened in the past 4 days, the SPSPV found itself right back down at the key support level in short order.

In the past 2 days, the index has broken that support.

Here is a closer look.

The fact that these small-cap value stocks were unable to bounce with the major averages over the past few months was a red flag. That they are now breaking considerable support is a bigger red flag. We have to think that if the index is unable to quickly reclaim the broken support, near 6900, that the broader market is susceptible to a selloff.

High Yield Bonds

The 2nd risk-on/off barometer we are watching is the high yield bond space. As high yield represents the riskiest of all bonds, the space actually trades in concert with equities much of the time. Thus, when high yield bonds are rallying, it is indicative of risk-taking, which generally includes a rallying stock market. This has been the case since high yield bonds bottomed out just over a year ago. Since that time, the rally in high yield bonds has been extremely persistent, with just a brief blip leading up to the election. Using the iShares High Yield Bond ETF (ticker, HYG) as a gauge, the space is up nearly 20% in the past year, and that’s without adjusting for the fund’s 5% yield.

Speaking of unadjusted, as we have been noting in recent weeks, however, the HYG has been approaching an important potential line of resistance. Specifically, on the unadjusted chart of the HYG, the fund has now rallied up to the 61.8% Fibonacci Retracement of the decline from its 2013 major cycle high to its 2016 low. That line sits at around the 88.2 level.

A week ago, the fund attempted to move above the level, closing at 88.36 on February 27. We hinted that, given the magnitude of the Fibonacci level, there was probably a better than average chance that the “breakout” would fail. That was especially true given the lack of consolidation prior to the attempted breakout. Indeed, over the past few sessions, the HYG has pulled back fairly sharply, closing today at 87.14.

Certainly, being just a few days off of a multi-year high, this action doesn’t signify a major breakdown in the high yield bond space. However, if the level here is as formidable as we’ve suggested, high yield bonds may have a very difficult time re-engaging a sustainable risk-on move in the near-term.

High-Beta Stocks

Lastly, let’s look at high-beta versus low-volatility stocks. As you might guess, it has typically been the high-beta stocks that have out-performed on a relative basis when the stock market has been in a risk-on mode. This can be seen in a performance ratio between the PowerShares S&P High-Beta ETF (ticker, SPHB) and the PowerShares S&P Low-Volatility ETF (ticker, SPLV).

When the High-Beta/Low-Volatility Ratio is rising, stocks tend to do well, in general. That was the case from 2012 to the spring of 2015, and again from early 2016 throughout most of the year. When the ratio has sloped downward, as it did from early 2015 to early 2016, stocks have been subjected to bouts of risk-off behavior by investors. In the past few days, the ratio has arguably broken its Up trendline spanning the past 9 months.

Now, given the fact that the SPHB has not suffered too much on an absolute basis, we’re not going to go overboard in ringing the alarm bells. Much of the recent change in fortunes in the ratio can be attributed to the post-election resurgence in low-volatility stocks. However, the inability of the high-beta space to keep up is at least a signal that the level of risk-taking in the market has likely been downgraded of late — as compared to that of the past 12 months, or in the immediate aftermath of the election.

So those are 3 metrics that we look at which can serve as non-traditional barometers of the status of the risk-on versus risk-off dynamic in the stock market. They are not infallible (nothing is). However, we like to track them, and other such under-the-radar indicators, as they can provide a valuable “tell” pertaining to the market’s risk posture — without being subject to the gaming and exploitation that more mainstream indicators are susceptible to given their hyper-popularity. And while these 3 indicators are nowhere near the red-alert, sky is falling level of concern, recent developments surrounding them certainly warrant a measure of caution here. It is especially true considering the key extension levels being tested by a host of popular averages that we have been noting for some time — as well as the prevailing, overly-bullish investor sentiment.

Given the market’s somewhat tenuous state in the near-term, should these risk-off signals prove accurate, stocks could be susceptible to a sharp selloff, even if temporary.

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Lower Taxes Should Boost Profits

Markets typically need a catalyst to break out of a multiple-year trading range. One possible candidate is the significant shift in market expectations related to the reliance on monetary policy relative to fiscal policy.

Lower Taxes And Higher Rates

The financial markets have been highly dependent on global central bankers in recent years (monetary policy). After the U.S. election, markets began to anticipate the possible benefits of President-elect Trump’s platform. From Yahoo Finance:

“We estimate that President-elect Trump’s corporate tax plan could boost S&P 500 earnings by $180bn,” writes Barclays’ Jonathan Glionna. “We think the market is underappreciating the likely big boost to S&P EPS from a lower corporate tax rate and the boost to bank profits from rising yields (and lower pension expense) and the much higher chance now of a long lasting economic expansion that rivals the 10-year US record,” Bianco added.

Numerous Longer-Term Market Signals

This week’s stock market video covers a long-term breakout in an economically-sensitive sector (XLB), describes a shift that has resulted in stocks outperforming bonds in the past, and updates the status of numerous long-term signals that have accrued in recent months.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

Goldman’s Take On Trump’s Tax Plan

Sentiment shifts need to be backed by fundamental shifts for market gains to continue. The odds are extremely high corporate taxes are going to be lowered under the Trump administration. Lower taxes will impact earnings; the only question is the magnitude of the impact. From Yahoo Finance:

In a note to clients shortly after the election, analysts at Goldman Sachs outlined a number of tax scenarios that could play out in a Trump administration. Among them is a reduction in the statutory tax rate from the current 39% to 25%, while companies keep their strategies to pay less effective tax. Under this scenario, an effective tax rate falling to 15% could see S&P 500 earnings rise 26% in 2017 compared to 2016.

Investment Implications – The Weight Of The Evidence

Emerging Markets Break Out

Assisted in part by some improvement in China, emerging markets (EEM) recently cleared a resistance zone that had bounded prices for several months. From Bloomberg:

Since China is a major export market for developing nations from Brazil to South Africa, signs of an improvement in the nation’s manufacturing industry bolsters the case for investing in riskier assets….“Reasonable data from China has opened a window for emerging markets to outperform,” said Maarten-Jan Bakkum, a senior strategist at NN Investment Partners in The Hague, who favors Indian shares. “Emerging markets have been very strong relative to developed markets in the past week.”

Improvement Relative To Defensive Assets

A tick up in the market’s tolerance for risk can be seen in the chart below, which shows the performance of emerging markets relative to intermediate-term Treasuries (IEF). Increasing expectations for even more easing from central banks have assisted numerous risk markets since the Brexit referendum, including emerging economies.

Some Hurdles Left

It would be easier to take, or add to, a stake in any of the markets covered in this post if energy (XLE) and materials (XLB) can clear the areas of possible resistance shown below. Therefore, emerging markets and some cyclical sectors are sending mixed messages, especially on a shorter-term time frame. The longer-term message, given what we know today, is an increasing willingness for investors to own more growth-oriented assets.

More risk equals more return. Less risk equals less return. These are the commandments of the Capital Asset Pricing Model (CAPM), taught to first-year business students all around the country.

Sounds reasonable enough but the CAPM is not one of Newton’s laws of motion; it is just a theory. In reality, while markets are highly efficient they are not perfectly efficient, and there are certain market anomalies that violate the laws of the CAPM.

One of these anomalies, known as the “low-volatility effect,” argues that portfolios of low volatility stocks tend to produce higher risk-adjusted returns than portfolios of high volatility stocks. Lower risk with higher returns sounds too good to be true but the evidence at this point is overwhelming.

Haugen and Heins first introduced the concept in 1972, studying stocks over the period from 1926-1972. Since then, there have been numerous confirming studies including Baker and Haugen (1991), Clarke, de Silva and Thorley (2006), Blitz and van Vliet (2007), and Baker, Nardin and Haugen (2012).

[Side Note: In 2014, I contributed my own study in what I call the Defensive Sector Anomaly. In the piece I showed that the three lowest beta sectors in the S&P 500 (Utilities, Consumer Staples, and Health Care) have outperformed the higher beta sectors (going back to 1989) with lower risk. Additionally, in all four of our research papers (click here to download) we illustrate anomalies and strategies that challenge the CAPM.]

All Anomalies Have Cycles

While the evidence supporting the low-volatility effect is indisputable, it is important to remember that this does not mean the outperformance is anywhere near a constant. Far from it. All anomalies have cycles and undergo periods, sometimes long periods, in which they underperform. In the past year, I’ve written posts emphasizing this point in writing about the value and momentum anomalies.

Today I want to focus on volatility in analyzing the S&P 500 Low Volatility and S&P 500 High Beta indices. These indices pull the 100 lowest volatility and 100 highest beta stocks from the overall S&P 500. The look back period is the prior 252 trading days and the indices are rebalanced quarterly. The inception of both indices dates back to November 1990.

How have the indices fared since inception? The Low Vol Index has produced an annualized return of 11.0% with annualized volatility of 11.0%, trouncing (on both absolute and risk-adjusted basis) the High Beta Index that returned 8.9% with volatility of 28.2%.

End of story? Not exactly. You see, following the Baker/Haugen (1991) study which analyzed stocks up to 1990, High Beta would go on to outperform Low Vol in 8 out of the next 9 years. The cumulative return from the High Beta Index over this period (1991-1999): 696% (26% annualized) versus 279% (16% annualized) for the Low Vol Index.

How many investors, particularly towards the end of this period, would have stuck with low volatility stocks and avoided the temptation to chase high beta? Not many.

What happened next? The Tech bubble would burst and Low Vol would outperform High Beta in each of the next 3 years (2000-02), producing a cumulative gain of 21% during this period versus a 65% decline in High Beta.

From there, a new bull market would ensue that saw High Beta outperform Low Vol by 57% from 2003-05. From there, Low Vol would again outperform in each of the next 3 years (2006-08), which of course included the financial crisis of 2008.

A new bull market was born in 2009 that saw High Beta outperform Low Vol by 63% from 2009-13 (174% gain versus 111% gain). Since then, Low Vol has outperformed with a 29% gain in 2014-2016 YTD versus a 1% loss for High Beta.

What does all of this back-and-forth tell us? That volatility is cyclical. While Low Vol may outperform overall, it does not come anywhere close to always outperforming. If we look at rolling 5-year returns, Low Vol has topped High Beta 62% of the time. That means that since 1991, 5-year returns were higher in High Beta than Low Vol 38% of the time, and at times significantly higher.

Where Are We Now?

Where are we in the volatility cycle today? Well, the most recent 5-year period shows a return of 83.8% for Low Vol versus only 28.5% for High Beta. If we pull this back to the past 10 years, we find that Low Vol has returned 145.3% versus only 13.3% for High Beta. This is an unbelievable spread over a 10-year period.

Back at the February lows, I noted that the ratio of High Beta to Low Vol had moved all the way back to March 2009 levels. This was an incredible development considering the S&P 500 had more than tripled during this period.

Another way to see the extreme outperformance of Low Vol at the February lows was to look at the performance of the ETFs designed to track the High Beta (SPHB) and Low Vol (SPLV) indices. I tweeted at the time that SPLV had advanced 69% since its inception in 2011 versus a decline of 0.2% for the SPHB.

Given this backdrop, I think it’s safe to say the environment has been favoring Low Vol for some time now, perhaps an indication that the near-term cycle may begin to favor High Beta.

Other evidence of a possible change in leadership? Fund flows.

Josh Brown of Ritholtz Wealth wrote an interesting piece on sentiment this week noting that the US minimum volatility ETF (USMV) has had the largest inflows of any ETF year-to-date, topping even the Gold ETF (GLD). Also on the list of largest inflows is the EAFE Minimum Volatility ETF (EFAV).

If we look at SPLV and SPHB since their launch in 2011, we find an incredible spread in terms of assets. The Low Vol ETF (SPLV) has raised $6.9 billion versus only $88 million for the High Beta ETF (SPHB). These flows are likely 1) a product of increased awareness of the Low Vol anomaly combined with 2) the incredible outperformance of Low Vol over the past few years and 3) fears of another 2008.

We may be reaching point, though, where past outperformance comes at a price. The price here being lower future returns due to elevated valuations. If we look at the Low Vol ETF, it appears more expensive on virtually every valuation metric than its High Beta counterpart.

The Volatility Cycle

None of this is to say that Low Vol will crash from here or has to underperform High Beta in the coming months. Extreme can get more extreme and cycles can last longer than you think. At the very least, though, a modicum of caution is warranted, especially if you are just learning about the Low Vol anomaly and are tempted to chase higher it after the fact.

Given the history of the volatility cycle and where we are today, such a strategy is nearly guaranteed to fail. As I wrote about value and momentum, chasing past performance in an anomaly can be harmful to the point of eliminating any benefit of adding that factor to your portfolio. The best time to diversify into an anomaly or asset class is after a long period of underperformance, not outperformance. This is easier said than done, of course, and why most investors will not reap any benefit from anomalies even if they do persist.

As for what this means for the overall market, I find it very interesting and unusual that the S&P 500 hit a new all-time high just a few weeks ago with Low Vol stocks leading the way higher. Many would call that a bearish signal which may end up being right unless conditions begin to change soon. If there is to be a cyclical rebound this year and a sustainable leg higher in the equity market, one would hope to see High Beta stocks lead that move. That’s a critical part of the Silver Linings Playbook I wrote about back in February and while we've seen some improvement in High Beta since, we need to see more.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Related:

The Defensive Sector Anomaly

Chasing Momentum

Anomalies, Cycles, and Inevitable Periods of Underperformance

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

High beta stocks were among those laggards that broke out above resistance last month, providing more fuel for the rally; they are now testing that breakout level.

We last wrote about high beta, or momentum, stocks on April 7. After a solid bounce off of the February lows, the group -- as represented by the PowerShares S&P 500 High Beta ETF, ticker SPHB -- had reached a level containing multiple noteworthy lines of resistance. The reaction at this level, we argued, could be an important tell for the further prospects of the broad post-February rally:

“One development that would go a long way toward the “merely a pause” scenario, would be a breakthrough of resistance levels among some of the more beaten-down and speculative areas of the market. Such a development would suggest the potential of a rotation of new leadership from the more defensive areas to the more “risk-on” areas of the market. This could give the rally the jolt of energy needed to propel it on to a new, durable leg of advance.”

The point of our April 7 post was that the high beta group failed convincingly in its initial test of the aforementioned resistance. However, we went on to say that this failure:

“...does not necessarily spell the end of the line for high beta stocks or the post-February stock market rally, in general. Perhaps they will get a dose of “risk-on” cortisone yet that will propel these stocks to new rally highs above the listed resistance.”

Indeed, just a week later, high beta stocks, along with a host of other laggard groups had pulled a u-turn and broke above the former lines of resistance. This brought an immediate jolt to the market, lifting stocks to new rally highs over the next few weeks.

In the longer-term, however, this breakout among the laggards, like high beta, is obviously only meaningful if it can be sustained. Of concern, we have seen a few examples among these groups, e.g., Germany, that appear to be failing to hold their breakout levels. Many others are now coming down to “test” those breakout levels of former resistance to see if they will now serve as support. This includes the high beta SPHB.

As the chart indicates, lines of consequence at present levels near 29 include the:

Post-2011 UP Trendline

12-Month Down Trendline

200-Day Simple Moving Average

50-Day Simple Moving Average

As we mentioned in the April post:

“If the post-February rally is to include another leg higher, it would be a great help if these higher beta areas would step up and pull their weight.“

For high beta to pull its weight, the first order of business is to successfully hold last month’s breakout area. This is a common theme among many of the former laggards that experienced promising breakouts last month.

Thus, while this may seem like a rather innocuous Chart Of The Day, this development is fairly widespread. Therefore, we do not think we are overstating things by saying that the longer-term potential of the post-February rally may very well depend on the outcome of these tests across the market.

A failure here could suggest the end of the line for the rally as the high beta, etc. areas that appeared ready to fuel another leg up in the rally proved to be out of gas. On the other hand, a successful test and hold here may enable these sectors to regain their mojo and lead another risk-on advance in stocks.

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More from Dana Lyons, JLFMI and My401kPro.