Treasury yield reversal looks important - Regional banks favored

Key Takeaways

• US Equity rally extending and should reach February highs before stalling out
• Both Industrials & Materials seem to be kicking into gear given the commodity boom
• Treasury yields look to be making an important reversal, which bodes well for yields to climb into March FOMC meeting.  Financials should outperform on this move.

Wednesday’s gains to multi-day highs resulted in SPX finishing at the highest levels since mid-February.  Trends and momentum have improved, and further upside looks likely, which might reach early February highs before any sort of stalling out.  Sector-wise, Industrials and Materials seem to be kicking into gear given the commodity acceleration lately, and Treasury yields made a big reversal Wednesday, which has bullish implications for yields in the weeks ahead.  Overall, stock trends are short-term bullish, as part of ongoing two-month downtrends.  SPX has short-term upside targets near 4485 initially, with leading to Fibonacci retracement targets up near 4542-8.  This area would also allow for wave equality to the two bounces off February lows, representing an area of initial resistance which should be watched carefully.

Both Industrials and Materials continue to strengthen

Increasingly, the Russian invasion has resulted in two key groups starting to really show far more strength than most of the market outside of Energy:  Industrials and Materials

Initially, the commodity move was led by Energy, but slowly but surely we’ve seen the base metals start to kick into gear.  Most stocks with exposure to Steel or Aluminum have shown stellar technical strength lately, and the Grains have followed suit on WTI Crude’s acceleration higher aiding the Agricultural subsector within Materials.   This relative chart of Equal-weighted Materials to SPX shows the absolute and relative charts of Materials and its ratio over SPX, shown below.

As shown on the bottom half of this weekly chart of Equal-weighted Materials ETF, RTM, this sector now looks to be extending 2021’s relative breakout vs SPX representing nearly a 10-year relative breakout.  Thus, while many are inclined to sell into movement in commodities, it looks likely that this outperformance in many stocks tied to commodities outside of Energy could be just getting underway. 

Chemicals looks to be the next group which should be watched carefully for signs of outperformance.  Stocks like LYB, DOW, EMN all have underperformed in recent months, but were higher by 2%+ on Wednesday and should be watched carefully.   Chart of RTM shown below.

Treasury yields likely to push higher back to new monthly highs into mid-to-late March

Wednesday’s comments by FOMC Chairman Powell seem to have comforted the market, providing some clarity as to the Fed’s intentions precisely at a time it was needed.  Many argued it was a more dovish retreat from the formerly hawkish comments made by Bullard a few weeks ago, and markets seem to be more in tune with Powell’s message.  Equities rallied sharply, and Treasury yields also followed suit higher, with 2’s, 5’s, 10’s and 30-year yields all making material movement higher during Wednesday’s session. 

As I’ve argued a few weeks ago, trends and cycles both suggest that yields likely push up into the March FOMC meeting, and recent pullbacks in US 10-Year Treasury yields (TNX) don’t seem to have harmed the bullish technical structure.  Movement back higher to test and exceed February’s early 2.065% peak looks likely, with targets ultimately found likely between 2.15-2.25%  

However, this yield move likely doesn’t represent something that carries yields that much higher in the bigger scheme of things in the weeks/months to come.  Both Elliott-wave projections and cycles show a greater than average likelihood of yields peaking out and pulling back, starting in late March into Summer/Fall 2022.  

In the short run, using the recent pullback in yields to buy into Regional Banks looks appealingand stocks like PBCT, HBAN 0.28% , ZION and RF 0.40%  all seem to be actionable as March gets underway.  The Regional Banking ETF, KRE 0.85%  continues to be something I find appealing, and I expect a push up to $79-$80 looks possible in the weeks to come.

WTI Crude surging up another 8% to 2011 peaks!  Finally, last, but not least, it remains critical to keep a close eye on what’s happening in WTI Crude.  As might have been expected, the market seems to have viewed the Strategic oil reserve release of 60 million barrels as being a “drop in the bucket”.   Crude surged more than 8% on Wednesday, with front-month WTI Crude futures having just reached former highs not seen since 2013, with 2011 peaks near 114.50 being just above Wednesday’s highs of $112.51.

The acceleration certainly has brought momentum levels to overbought territory.  However, it’s rarely correct to sell into momentum surges which create gaps on daily charts, specifically given geopolitical situations that haven’t been resolved. 

Technically, the area near former highs might hold temporarily, but I’m increasingly of the opinion that a much larger move is getting underway, and it’s likely wrong to try to sell into gains with thoughts of trying to catch the exact highs and buy dips.  My expectation of WTI Crude getting to $114 as per my 2022 Webinar happened in a mere two months, and larger cycles still point to higher prices into Summer of 2023.  Thus, it’s right to own Energy, not look to tactically trade in and out of price swings.  One should make use of minor weakness to simply buy dips and consider XOP, OIH and also XLE as multi-year longs.