The world has been engaged in a constant game of Fed watching since the Federal Reserve indicated that a turn in policy, from loose to tight, would be on the agenda for 2022. This activity hasn’t been limited to US stock traders. Traders of almost all asset classes, from FX, through commodities, all the way to crypto, are keeping their eyes peeled and ears open for any sign that a pivot from hawkish back to dovish may be on the way.
And while the recent softer than expected CPI print may have given animal spirits a little boost, causing the DXY to come off its highs and allowing for some movement in assets priced in dollars (as well as the dollar crosses), there is no real indication as yet that the Fed is about to blink.
So, with all this in mind, we thought it would be a good idea to look at some of the sectors, asset classes, and individual symbols that have been performing well in this environment. More than that, though, we’re specifically interested in potential trades that aren’t as dependent on the Fed’s next move in order to keep performing. Further, we’re also interested in assets that have a longer-term trend behind them and that aren’t as driven by the other major news stories of this year, such as the war in Ukraine.
The big-picture view
Of the four major US indices (S&P 500, Nasdaq 100, Dow Jones Industrial Average, and Russell 2000), only Dow Jones is currently trading above its 50-week moving average. The rest appear to be setting weekly higher-lows (typical of bear market bounces). The Dow Jones has yet to set a weekly higher-high at this time, having closed at the same level as August’s high in the week ending Friday, November 11.
Focusing on the sectors
If you look at individual US stock market sectors, you’ll notice that the best-performing sectors (judged by where they are currently trading in relation to their 50-week MA) are: Industrials, Metals & Mining, and Energy.
Energy is the best-performing sector of the entire US stock market by far, having shielded investors with exposure to it from the worst of the declines we’ve seen in the broader market throughout 2022. In fact, Energy is also the only sector to have significantly surpassed the August peak. It has not only broken its August highs; it’s currently trading at levels last seen in 2014. It has also held its own 50-week moving average ever since the post-covid-crash bounce in November 2020.
Metals & Mining, and Industrials are performing even in the face of a slowing economy, in part, due to heightened energy costs. As such, they can be regarded as proxy energy plays because you can’t separate their performance entirely from the price of energy, particularly the raw materials that are constantly required as inputs in industrial applications.
Financials, Materials, and Healthcare are also trading just beyond, or at, that 50-week MA level, and are currently trading just a touch beyond their August highs. Financials thanks to the new higher rate environment, and Healthcare due to a general rotation away from growth into value.
We can exclude Financials and Healthcare due to the fact that their performance is, in some measure, driven by the Fed’s hiking of rates and the resultant underperformance of growth stocks. If we also exclude crude oil and natural gas due to their volatility, as well as the massive influence that the war in Ukraine is having on them; metals, particularly industrial metals, start to look very intriguing.
Copper, in particular, could be said to be one specific asset that is currently positioned to benefit from a variety of scenarios, and is not dependent on any specific narrative in order to perform.
It is sensitive to energy inputs because it requires energy to mine and refine. It stands to benefit from the move away from fossil fuels as it’s a central component of green technologies and electrification. In the short-to-medium-term, it’s also likely to receive a bid as China relaxes its Covid Zero policy and commences its own re-opening.
Technically, too, it has a lot going for it. It has recently held its 200-week moving average as support, and, unlike crude oil or natural gas, it is currently still trading below its own 50-week moving average, so it still has a long way to run if the above arguments prove to be true. The RSI also put in a very solid oversold low back in July, which was actually slightly lower than the low it set during the March 2020 crash. That former low proved to be the start of a new bull market in copper that lasted for more than two years.
Certainly food for thought, and it’s worth keeping an eye on that 50-week moving average as the price edges closer to it.