GDX, GDXJ: A Fall Before The Carnage

To that point, while the general stock market has been rising in recent weeks, breadth has completely fallen off a cliff. For context, breadth can take on many forms, but it often compares the number of stocks in an index that are rising to the number of stocks in an index that are falling. In a nutshell: if a small portion of stocks are responsible for the uprising, there is severe weakness beneath the surface. And with the Russell 2000 (small caps) demonstrating just that, the weak are already being sent to slaughter.

Please see below:

Source: Bloomberg/Liz Ann Sonders

To explain, the orange line above tracks the percentage of stocks in the Russell 2000 that are trading above their 50-day moving average, while the blue line above tracks the Russell 2000/S&P 500 ratio. If you analyze the right side of the chart, you can see that both metrics have moved sharply lower.

Furthermore, while investors have dropped the guillotine on the weakest members of their respective indices, the rotation has caused index heavyweights to become extremely bloated. For example, the five largest stocks in the S&P 500 – Microsoft, Apple, Amazon, Alphabet and Facebook – now account for 23% of the index’s market cap.

Please see below:

To explain, the five largest companies in the S&P 500 accounted for roughly 18% of the S&P 500’s market cap at the height of the dot-com bubble. And while the figure has declined from its 2020 peak (roughly 25%), it’s been moving higher in recent weeks (follow the dark blue line). As a result, a handful of stocks have been doing the bulk of the S&P 500’s heavy lifting.

Will There Ever Be a Renaissance in Europe?

And while the wheels are in motion, the EUR/USD – which accounts for nearly 58% of the movement of the USD Index – is already struggling to hold 1.1800. Moreover, hopes of an Eurozone economic Renaissance have already come undone.

To explain, I wrote on May 20:

With optimism abound, European banks, energy stocks and breakeven inflation rates have helped boost the EUR/USD. And while investors are extrapolating the cyclical strength as grounds for the European Central Bank (ECB) to reduce its bond-buying program in June, haven’t we seen this movie before?

To explain, if you analyze the chart on the right, you can see that hawkish ECB positioning implies being long Eurozone banks, short Eurozone bonds and long the EUR/USD. However, if you analyze the peaks in the light blue line, you can see that prior bets on ECB tightening have ended in extreme disappointment. For example, when the ECB hiked rates twice in 2011, Portuguese sovereign debt was downgraded to junk, and less than a year later, Greece was forced to restructure its debt in order to remain in the European union. Likewise, it didn’t take long for all of the cyclical bets to unwind and for the EUR/USD to plunge. Second, after foolish optimism sent cyclicals soaring in 2018, the bets unraveled, and once again, the EUR/USD plunged. Thus, is this time really different?

Well, with two months mirroring the difference between night and day, cyclical positioning has sunk like a stone.

Please see below:

To explain, if you compare the position of the light blue line on the right side of the chart above (approaching zero) with its position on the first chart (roughly 1.75), you can see how much things have changed. As a result, not only is the U.S. economy outperforming the Eurozone, but the U.S. Federal Reserve (FED) and the ECB are worlds apart.

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Disclaimer: All essays, research and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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