Brooke Thackray:
Hi, I’m Brooke Thackray. I’m out here riding today with my friend Keith Richards from ValueTrend. We’re just talking about the markets, what’s going on. Lots of stuff happening. We’re seeing it marked with very poor breadth right now. And we’re going to talk about some seasonals today. We’re going to talk some sentiments, we’re going to talk a bunch of stuff and, and just get an update on the overall markets. I’m going to pass you over to Keith right now.
Keith Richards:
Hey, Brooke. So, yeah, it’s a beautiful day and we’re on our bikes. So despite the maybe concerns that people have about the markets right now, given the poor breadths and stuff, and I guess we’ll talk about that in a minute. There’s not a lot to complain about when you’re riding your bike on a nice day like this is there?
Brooke Thackray:
This is totally awesome. It’s amazing weather out. Absolutely beautiful. I just wish the markets were the same.
Keith Richards:
Yeah. So let’s talk about seasonals, Brooke, because you’re the seasonal guy. Actually, that’s how we met probably 20 years ago. I sent you a letter or something like that before the internet was invented and asked you about your seasonal perspectives on things. So let’s start that question again from 20 years ago. So what’s your outlook on seasonals for the next couple of months?
Brooke Thackray:
Well, on a seasonal basis right now, it’s not very good coming up. We’ve had some good times in the market recently for the S&P 500. I want to qualify that because the S&P 500 has done really well but that’s a few stocks, not the TSX. So the TSX is actually down since May. So it hasn’t been strong all the way around, but right now we’re coming up to a time period where the seasonals actually start to get weak. So it’s something to watch out for.
Keith Richards:
So, Brooke, I have to ask you a question right now. Talking about breath and, I complain a lot about the poor breadths we’ve had as I think anybody involved with technical analysis has made that observation. But I have noticed, and I’m sure you have too, that breadth is beginning to improve. If you look at sort of the recent movements, and I’m talking just two, three weeks, not too long, where there has been some strength emerging in some of the other sectors. Whereas if you drew a sector strength chart on StockCharts, even just going back three months ago, it was basically one big bar on technology and everything else was like this high. So what is your take on that?
Brooke Thackray:
So we had such a narrow, narrow market. I know I did some writing and I talked about the magnificent seven. Seven stocks carrying the S&P 500. Yeah. And everybody’s looking at those seven stocks, and you’re absolutely right. We have seen some broadening out of that, which is positive. There’s no question. But we were so narrow before. Absolutely so narrow. It couldn’t keep up with seven stocks driving the market forever. So it’s positive, but we still need to see a lot more breadth in the market than what we’ve had so far.
Keith Richards:
Yeah. That’s my view exactly, is that it’s a good start. But it’s like the first month of school for a kid who’s always failed. And just because he gets one test that he passes doesn’t mean that he is necessarily going to pass the course.
Brooke Thackray:
Yeah. I mean positive signs. Yeah, absolutely. But relative to historical standards, it’s still extremely narrow right now.
Keith Richards:
Yes, it is. It is. When we talk about breadth, yes, you’re right. We’re a little early to suppose that we’re entering into a new era of broadening markets, but there are still some sectors from a seasonal perspective that the technicals seem to be lining up with too. So all hope is not lost for investors. It doesn’t necessarily mean that we should all be running and hiding in cash. So maybe Brooke, what’s hot over the next couple of months, even in a broad market period of seasonal weakness.
Brooke Thackray:
So yeah, if we take a look at some of the sectors that come up right now, we’re coming up first of all to what I call the danger zone. I just want to talk about the broad markets first. I know you asked me about that a little bit earlier as you were making me climb a hill, I was losing my breath,
Brooke Thackray:
But the danger zone is August and September are the two worst months of the year, historically, on a seasonal basis. It doesn’t mean the market’s going to go down that time period. It just means that on average, this is the worst time for the stock market. Now sure, if Powell pivots or something happens like that, the stock market can rally, but typically the market doesn’t rally in the next couple of months unless we’re coming out of a recession. We’re not coming out of a recession right
Keith Richards:
Okay. Yeah.
Brooke Thackray:
We may be heading into one, but we’re not coming out of one.
Keith Richards:
Yeah, that’s for sure.
Brooke Thackray:
So this is the backdrop that we’re in right now. So there are not a lot of sectors that have strong seasonal profiles at this time, but there are some places you can invest and one of them would be gold. I think that gold has a strong seasonal period at this time, starting really mid-July into early October. It’s been a little bit of a laggard this year. There’s a lot going on. Interest rates have come down but there are some tailwinds or headwinds that could be switching to tailwinds as well right now that could help gold beyond its seasonal period. Now, the reason why gold tends to perform well at this time is first of all, you get an influx of demand in the fall time, which translates back into increased demand for gold coming into autumn. So that tends to give the market a boost. You tend to have interest rates a bit lower, volatility tends to pick up. So a lot of positive things for gold. So I think gold could be a good trade this year.
Keith Richards:
Well, absolutely. I actually mentioned this on a video that I did on my end recently. We have a fairly flat looking US dollar, like the US dollar fell and now it’s kind of treading water sideways, and that can be good for gold because there’s a negative correlation between gold and the US dollar. If the US dollar is strong, gold tends to be weak and vice versa. So this maybe gives another impetus to your seasonal observations, would you say?
Brooke Thackray:
Absolutely. I totally agree. If you take a look right now with the US dollar, last week, we saw the US dollar go down quite a bit actually.
Brooke Thackray:
Yeah, that’s right.
Brooke Thackray:
The floor just sort of fell out from underneath it. It’s actually come down to a level of support. Internationally, it’s below the 100 on the Dixie. So if we see the US dollar weaken at this point, then that would actually be another support for gold to move higher coming up over the next couple of months.
Keith Richards:
Yeah, honestly, even if it just trades sideways, that’s still not a strong US dollar. That’s just a meandering dollar and that can add to the reason why people might seek refuge in gold. So absolutely. The technicals line up, the seasonals line up. So that is one trade. Let me ask you something. What do you think right now of the bond market?
Brooke Thackray:
Okay, I’m going to hope we’re in that picture.
Keith Richards:
I have no idea. I didn’t see it. It was just a black screen.
Brooke Thackray:
I can’t see either with my sunglasses. I hope we’re in there. It will just be beautiful scenery.
Brooke Thackray:
You and I riding along.
Keith Richards:
Oh, I turned it the wrong way.
Brooke Thackray:
Look at that tree. Look at that tree.
Brooke Thackray:
Beautiful tree.
Keith Richards:
Alright, so bonds.
Brooke Thackray:
So the bond market right now, actually, it hasn’t been doing that well recently. We’ve had a lot of impetus for the 10-year yield to move up. We saw the 10-year yield go above 4% just recently, a couple of weeks ago. So that took a little hit on the bond market. But I still think that the bond market, first of all, it’s come up to a seasonal period. It’s really sweet spot is in the seasonal period as well. So if you take a look at the seasonal sweet spot for bonds, it’s really August and September. Those are the two months when bonds tend to do really well. So we’re coming up to that period and yes, the Federal Reserve, it looks like 82% probability that the Federal Reserve’s going to raise interest rates, at itsnext meeting. But that’s already priced into the market.
Keith Richards:
They can get baked in.
Brooke Thackray:
Right. Yeah, exactly.
Keith Richards:
So I’m going to hit you with one that you didn’t know I was going to ask. So emerging market bonds.
Brooke Thackray:
So emerging market bonds
Keith Richards:
They’re breaking out. Technically they look like they’re just starting to break out. Now, it’s really early, but I’m looking at the chart, so I’m just curious about the seasonality.
Brooke Thackray:
Yeah, so emerging market bonds, so emerging market bonds are sort of quasi bond quasi-equity a little bit, right?
Keith Richards:
Yeah. And currencies too.
Brooke Thackray:
Yeah and currencies. So you got the whole thing in there and merging market bonds, if we’ve got the US dollar falling, that would be positive for merging market bonds. Absolutely. There’s no question. But I do want to say if we do see some volatility in the market, that could be a little bit of a risk scenario for emerging market bonds. It is possible.
Keith Richards:
It’s probably not a trade for the meek and mild, and honestly, it hasn’t broken out from my perspective as a pretty pure technician. I haven’t seen enough evidence of a prim and proper breakout on the chart. But there’s some evidence, and that’s why I’m asking you now.
Brooke Thackray:
Keith, I’m going to be honest, I haven’t done enough seasonal work with emerging market bonds to say that there’s what I see as a definitive seasonal trend right now. You might have done some work yourself on that, but I imagine right now with US dollar going down the emerging market bonds would be benefiting.
Keith Richards:
One last thing that we were going to talk a bit about and we both kind of look at this stuff, even though you’re a seasonal guy, I’m a technical guy, but there’s kind of some cross area within technical analysis and that’s sentiment. You and I both watch things like the VIX, we look at things like the put-to-call ratio, that kind of stuff. You’ve studied the VIX enough, like 12 – 13, you’re starting to get into that complacency area on the VIX and we’ve been kind of bouncing off of 13. We haven’t hit 12, but we’ve been hitting 13 pretty regularly, literally for the past month or so. What do you think about that? Do you have any comments on that?
Brooke Thackray:
Yeah, it’s kind of crazy. The VIX has gone so low. There might be some reasons for it. The VIX is a fear gauge. It can measure complacency in the market as well. We do have one day options trading right now. A huge part of the options market. Given that the VIX is calculated off of 30-day S&P options, now we got these one day options being traded so heavily, that would skew it a little bit. I think that’s an influence, but if you look at seasonality, seasonality says that typically the VIX goes down until, guess what? Mid-July and then it starts to pick up. It keeps going higher and higher into October. I know from 1990 to 2021 from early July to early October, the VIX has gone up 72% of the time.
Keith Richards:
So there you go. See, I just learned something new. That’s why I ride with you. It’s not because I like riding with you, it’s because I want to pick your brain.
Brooke Thackray:
Truth be told Keith, when we ride together, you can absolutely kill me. He’s quite the rider.
Keith Richards:
Okay, so Brooke, we talked about a couple of things that concerned us. We are concerned about market breadth. That is improving but isn’t near reaching a passing grade. We talked about sentiment. We talked about the VIX being kind of low. Some of the other stuff I look at as a sentiment specialist is reading complacency levels and that’s never good for a sustainable market. But let’s talk about some of the positives. What are some of the things that you see as opportunistic coming out of maybe the end of the bad six months and some of these other factors we talked about?
Brooke Thackray:
Yeah, so we did talk about a couple of opportunities. There are a lot more sector opportunities right in this time period as well. But you know, I talked a little bit about the danger zone, August and September being weak typically, but if we do see a correction in the market, I think that could actually be a great opportunity for the market. So it’s not like the world’s falling apart and everything’s going to end. Right now it’s all about risk-reward relationships. And right now on a seasonal basis, it’s not strong and given all the other headwinds, it’s not a great place to step on the gas pedal. But if we do see correction that happens, let’s say in September when corrections often do happen, then that might be a great opportunity to actually step in and, and to step on the gas pedal at that time. So it’s not all doom and gloom.
Keith Richards:
Absolutely. And I might add for my bit of a positive finish is that I have been watching those sectors that had not been participating in the market for the past six months. And like I mentioned, they are starting to emerge. I hope that they will continue doing so. And if they do so, for any of us that kind of focus on those overlooked sectors, over the coming summer we may just see a pretty good rotation into some of these sectors because when the techs take that back step and finally settle out some of their overbought conditions, what’s going to happen is money’s going to move into some of these overlooked sectors. There could be a massive opportunity when that happens and that, I wouldn’t doubt, will happen in line with the seasonal patterns of weakness into the fall and then opportunity after that. So the next few months could be an awesome opportunity to start picking away at positions that really are unloved value stocks.
Brooke Thackray:
Keith, I think it’s all about opportunities coming up in any possible downturn that we come up within in the near future. So why don’t we end that on a good note and a happy note and looking forward? Well, it’s been great coming out for a ride.
Keith Richards:
So Brooke, we’re getting faster and faster as you go down the hill I noticed. So we’ll end with that before we end up in a fiery ball of flesh and bones crashing. Okay?
Brooke Thackray:
Okay, sounds good. Thanks.
