Five Confidence Relationships Hit Multi-Year Resistance; Breakout Would Signal Much Higher Stock Prices

Many confidence relationships I follow have been confined to multi-year trading ranges, as investors have consistently swung between optimism and fear. The latest data show that many have rallied sharply and reached the upper region of this rangebound activity. That either means it's time to regroup and launch a breakout attempt later, or push through immediately. The stakes are high, as these trading ranges are so large that a breakout would signal  a major up leg in confidence involving substantially higher equity prices. Let's take a closer look.

Fidelity Growth and Income vs. Vanguard Long-term Treasury

Chart 1 compares the ratio between the Fidelity Capital and Income Fund to the Vanguard Treasury (FAGIX/VUSTX). The former is focused principally in high yield bonds, the latter on relatively safe but lower-yielding treasuries. A rising relationship means that investors are downplaying the risk of default as they maintain a preference for the higher yield offered by the Fidelity vehicle. A rising trend reflects growing confidence as this risk-on attitude is typically associated with higher stock prices. Using the benefit of hindsight, I have shaded periods when the ratio experienced an extended rising trend. If you look at the upper panel featuring the S&P, it's apparent that a rising ratio provides a great environment in which to invest or trade on the bull side.

Since last March, this relationship has rebounded very sharply and now finds itself at a 21-year resistance trendline. It's obviously overstretched and may need some time to digest recent gains. On the other hand, a move to new high ground would indicate a substantial breakout in confidence, which would be highly supportive of equities.

S&P Composite vs. The SPDR Consumer Staple ETF

Another confidence relationship can be obtained from a simple relative strength line of the SPDR Consumer Staples to the S&P itself. Staples are regarded as a defensive group because of their stable dividend paying habits and forecastable earnings stream. Since their relative strength tends to move inversely to the S&P, I have reversed the ratio and made the XLP the divisor. Now, when it rises, it means that the more speculative S&P is outperforming staples, thereby reflecting a trend of growing confidence. The shaded periods in Chart 2 appear when the ratio is above its 65-week EMA and its long-term KST is positive.

Generally speaking, a rising ratio (green shading) is bullish for equities. That's certainly been the case since last summer. October saw both series break to the upside, as they pushed above their respective resistance trendlines. Now, the ratio finds itself at a multi-year resistance trendline in a similar position to the Fidelity/Vanguard relationship considered earlier. A break above such a lengthy resistance barrier would clearly represent a major positive for the overall market.

Consumer Staples vs. Long-term Bonds (XLP/TLT)

We can also use staples in their relationship with treasury bonds. In this instance, the XLP is considered the riskier of the two. A rising relationship tells us that even though investors are flocking to a defensive group, such as staples, there is still a willingness to bid up a stock sector over an even more conservative bond. If market participants were expecting a recession, the ratio would be falling, as they would be emphasizing the guaranteed income stream offered by the TLT over the more vulnerable dividend stream promised by the XLP.

Once again, we use the benefit of hindsight to flag periods of a rising ratio. Note that they capture virtually all of the rallies and certainly sidestep the 2007-2009 near market and other periods of pronounced weakness. This series also finds itself at an important juncture point in the vicinity of the 2017-2021 resistance trendline.

S&P High Beta vs. High Quality (SPHB/SPHQ)

The ratio between the S&P High Beta and High Quality is a fairly obvious quality spread. Unfortunately, it has not been around for that long - however, it has proved itself as a useful arbiter of swings in investor sentiment. Once again, the shaded areas flag periods of an extended uptrend identified with the benefit of hindsight. Note how all the major advances are explained with a rising ratio, and unusual declines or rangebound activity have been avoided. This relationship broke the dashed green 2015-2021 resistance trendline a couple of weeks ago in a fairly decisive manner. It, like similar relationships, now finds itself at a longer solid trendline.

Global High Yield versus Global Treasuries

One final confidence relationship we need to cover is that between the iShares International High Yield Fund and the Barclays International Treasury Bond ETF's (HYXU/BWX). It is being compared in Chart 5 to the Dow Jones World Stock Index. The two blue arrows underscore the technical principle that a false downside break is often followed by an above average move in the opposite direction to the break. It's strong enough, in this case, to allow the Index to explode its way above the green resistance trendline. The ratio also pushed through a dashed trendline of its own. In recent weeks, though, the high yield/International Treasury relationship has jumped through an even longer resistance line, one that goes back to 2019. Since the long-term KST in the bottom window is now firmly bullish, but by no means overextended, this argues for even greater strength in the confidence ratio. Given its closeness to equity trends, that should enable global stocks to move higher as well.

Good luck and good charting,

Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Groupof Walnut Creek or its affiliates.