FSInsight subscribers hopefully received my technical update Friday afternoon. Given the market sell-off this week, I wanted to provide some perspective on what I saw developing technically. I won’t rehash the full note, but I do want to highlight one of the more complicated, some would say noisy, charts I included in the email.

Interest rates remain a lightning rod for many of the trends and distortions we see in capital markets. Negative real rates, the difference between nominal yields and inflation, have fueled the surge in low volatility assets, growth stocks and gold. This week’s chart illustrates the trend in US 10-year real rates since March which is clearly down with a series of lower highs and lower lows.

Real rates undercut the August 6 lows (-1.11%) on September 9 (-1.12%) BUT have since rebounded. Interestingly, growth stocks began to sell-off as real yields began to firm this week which is a relationship we want to monitor very closely going forward. Granted, it’s very early to conclude an upside trend reversal is in place which would require a move above the prior highs at -.9475%.

However, note the daily RSI momentum indicator (second panel) is positively diverging with higher lows while real yields made lower lows. Again, it is very early to draw dramatic conclusions an upside reversal is developing yet, but it is exactly the type of technical divergence I would expect to see if a reversal were in the early stages of developing.

Real Rates and S&P High Beta ETF Support Adding Cyclical Exposure
Source: Fundstrat, Bloomberg, Optuma

Lastly, and most interestingly, the ratio of the S&P High Beta ETF (SPHB) versus the S&P Low Volatility ETF (SPLV) has similar inflection points to the directional ebb and flow of real bond yields. This actually makes a lot of sense given the SPHB is heavily weighted toward cyclical stocks and any hint of an improvement in the underlying economy is likely to see real bond yields and cyclical stocks rise.

So, what’s the bottom line as an investor? Once again, the technical evidence is incrementally supportive of adding more cyclical exposure to portfolios.

Bottom line: The US 10-year real yields rebounding, daily RSI positive divergence, and the SPHB vs SPLV ratio on the verge of a breakout provide technical evidence in support of adding more cyclical exposure to portfolios.

Figure: Weekly Sector Review
Source: FSInsight, FactSet

Real Rates and S&P High Beta ETF Support Adding Cyclical Exposure

Figure: Best and worst performance sectors over past 3 months

Real Rates and S&P High Beta ETF Support Adding Cyclical Exposure

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