The Fred Report - Weekly November 6, 2023

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Summary of Market View 

In Stocks, we discuss last week’s market action, and then move into a discussion of the Transports, as they have been weak in 2023. In Fixed Income, we discuss some of the shorter interest rate ETFs, and compare these charts to TLT. There are a couple of significant technical differences.

In Commodities we look at the two main foreign currency ETFs. There has been some significant technical action in these. In International, we discuss the Japanese stock market ETFs, and we make some recommendations based on the currency action. Last, in Chart of Interest, we show Fred’s Volatility Index.    

Stock Review (Back to top) 

Stocks rallied last week, as we forecast. While the rally looked robust technically, our internal indicators suggest it was not as strong as it looked. Accumulation models recovered somewhat but have not erased the technical damage done in October. Breadth and price oscillators have improved but some are still in a negative configuration. We have mentioned that we are looking for a rally into Thanksgiving, and we still expect this, albeit with some choppiness that could start this week. These indicators could continue to improve, erasing some of these problems. One of the problems with last week’s trading was that several gaps occurred, and this week should see some pullback to fill these.

One area that has concerned us has been the Transportation stocks and their indexes/ETFs. These have been weaker than the general market, a concern that normally suggests a weakening economy. IYT is the main transportation ETF we follow, and it came very close to making new 52-week lows on this last correction and did make new 2023 lows. Support is 210, then 205. Resistance is 240 to 260 in layers, but with strong resistance at 260. The daily stochastic is in buy mode, and the weekly is still a sell pattern. My favorite Transportation ETF is XTN. It has been stronger, double bottoming with the 2023 low, and holding support in the 64-area. Resistance at 70 is being fully tested, and if this area is exceeded a test of 78 to 80 can be expected. The stochastic pattern is the same as IYT, but actually a little weaker. We show these charts below and note that we would like to see these improve in relative performance through the end of the year.

Fixed Income Review (Back to top)  

Bonds have also rallied, as we expected last week. We note that our target for the first part of this bond rally was the 90-area on TLT, and in fact TLT traded to 89.05 - close enough to suggest some backing and filling here also – there are some gaps to fill. Where can TLT trade on the downside? It looks to us as if a move down to the 85.70 to 85.30 is in the cards this week. Similar to stocks, accumulation models have not recovered as much as we would have hoped, after weakening in late September/early October. TLT needs more improvement ahead.

One concern we have is that interest rates have acted as if the Federal Reserve (FED) was going to start to lower rates, when they have said nothing of the kind. What this means is that rates will have to find an equilibrium area as the market indicates. Rates could be higher for longer than people expect. We have focused on TLT, but how to the shorter rates looks. We will look at IEI (ishare®Barclays 3 - 7 Year Treasury Bond) and IEF (ishare®Barclays 7 - 10 Year Treasury Bond). We will look at the intermediate – term charts of these. IEI is the only one of these that followed our false breakdown scenario, as the last new low qualified as a false breakdown. This is interesting, as we expected this on longer rates and not the short rates. Still, this gives us a benchmark for IEI. If the last low at 111.45 breaks, it would be an excellent sign that short-term rates should move higher. IEF has been a bit weaker. This is rallying under a similar scenario, and it is above the 89.76 low. Back below that would also be a concern. This is still a false breakdown, but it is less clear. Again, back below 88.86 would be a concern. We don’t discuss TLT here, as we have no opinion changes, but we will show the chart. We show charts, below. 

Commodity Review  (Back to top) 

Let’s take a look at FXE and FXY. FXE has gapped up along with the stock and bond markets and will likely pull back and fill some of these gaps. Indicators are overextended, and as we have mentioned elsewhere, the dollar has been in an uptrend since 2014. Support remains the 96 to 95 area. Resistance is around 100 and should hold this for a while. The daily stochastic is turning up from midrange but is still in sell mode, while the weekly is a buy recycle.

FXY is an interesting chart – it may be a false breakdown. A close above 62.50 on FXY would tend to confirm this. The daily stochastic is in buy mode, and the weekly is still oversold. In addition to being a short-term false breakdown, there is also some chance that it is also a false breakdown vs. the October 2022 low. If this is the case, there is a good chance that FXY will stage a relief rally to the 65 to 67-area resistance. When this gets overbought, we will take another look. We are not recommending this here, but we are recommending a change in strategy for Japanese stocks in the International Section on the next page. The reason we are not recommending the currency directly is because currencies trend more than every other futures contract – and this is still a downtrend. It will take more time and trading action to determine whether the trend has reversed. 

International Review  (Back to top) 

We have been asked about Japan, which has been one of our favorite international markets. We still like this market, which has had a decent pullback, based on both dollars and Yen. We will look at two ETFs in this area: EWJ (iShares® MSCI Japan Index Fund) and DXJ (Wisdom Tree Japan Hedged Equity Fund ETF). Both of these are good charts, that have had strong years, but our favorite has been DXJ, because of the strength in the dollar relative to the Yen. Since there is some possibility of Japanese government intervention to support the Yen, we will recommend EWJ for a trade into yearend. Let’s look at both of these ETFs. Before we dive into this, we want to be sure that readers understand we are NOT recommending sale of DXJ, which has been a top performer in 2023.

We will show these charts in an interesting way – relative to FXY. It is not surprising that DXJ is showing major relative performance – it attempts to hedge out the effect of the dollar (and remember, there is never a perfect hedge). What IS interesting is the relative performance of EWJ, which has really improved over the last few weeks, but really has been improving since January. The short-term improvement is why we have decided to recommend this now for a yearend move. EWJ has support from 57 to 55, and resistance is 63 to 65. Above this area would suggest a test of the 70-area, close to multi-year highs. DXJ should also perform well on an advance, but it could finally start to do a bit less well. Note EWJ was up 1.7% Friday, while DXJ was up 1%. A satellite position in EWJ could do very well over the next few months.

Weekly Chart of Interest  (Back to top) 

We show the daily chart of Fred’s Volatility Indicator. The pattern on this also suggests bottoming action. While this indicator is mostly a condition indicator and not a timing tool, the pattern here suggests some rally at least until Thanksgiving.

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