A Defensive rally into 50% retracement = Time to pay attention

Equity markets have now risen roughly 9% in the last 10 trading days(SPX), pushing up into levels just shy of the 200-day moving average for QQQ and 50% retracement area. (61.8% for SPX) While rates have screamed higher on a seemingly hawkish pivot by Powell, (2-yr. yields are set to record one of the largest months of yield gains in over 15 years) the question remains, can this rally persist?   I’m of the opinion that markets should in fact peak out over the next 1-2 weeks, and consolidate at least half of recent gains.  If the selloff breaches 61.8% of this range, then a full retest and break of lows is likely and would point down to SPX-3900-4000.  At present, SPX requires a break of 4455 to confirm this move has begun and has upside resistance between 4543 and 4565.  Only a move over 4600 would cancel this thinking, which sets up for a good risk-reward for trading purposes for those who wish to diversify/hedge/sell after this runup.

The following points are concerning Technically

(I won’t go into any discussion of the current Geopolitical situation or Fed Futures showing markets having priced in faster hiking plans as I believe it’s difficult to forecast markets based on these factors)

-Daily momentum (per Relative strength index (RSI) is now nearing overbought levels while weekly, monthly momentum (per MACD) are negative and have crossed the signal line lower.

-Intra-day momentum gauges per RSI are now showing negative momentum divergence

-Prices have risen into 50-61.8% retracement zones of the entire decline from January, normally a spot which can provide meaningful resistance, particularly as this also is near the 200-day moving average (m.a.) which had been violated

-Breadth has risen short-term, though longer-term breadth remains a concern with less than 50% of all issues above their respective 200-day m.a.’s.

-While SPX has now climbed to within 5.5% of all-time highs, more than 30% of the SPX remains down more than 20% off its 52-week highs

-Sector participation has not been as broad-based as desired (Technology has underperformed Utilities over the last week and month, despite rising rates) and only Energy, Materials and Utilities are higher by more than 5% on a 1-month percentage basis (of the major SPDR S&P Select ETF’s)

-To that last point, Utilities have just broken back out to new all-time highs, and are the 2^nd best performing S&P SPDR Select ETF of the year behind Energy

-While some sentiment polls indeed remain bearish based on understandably negative macro factors, gauges like Equity put/call ratio do not show this fear.  (As discussed yesterday, Calls are being bought by more than a 2/1 ratio over Puts and Fear and Greed is back firmly in Neutral territory)

-Cycles on Equities show weakness from April-late June based on mid-term Election year tendencies which also line up with my Cycle composite and Mass Pressure Index, created by W.D. Gann

-Elliott-wave structure argues that the February low was very likely not “the low” for this decline from January, as the move was choppy and overlapping near the bottom.

Overall, I have an open mind, and am willing to get more onboard with the idea of the rally extending if there is proof.  For now, it’s been an overly defensive push higher of late, where Tech has lagged, rates have screamed higher, and prices are now nearing areas that technically are important as price-based resistance.

As the sector table shows below, it’s been right to favor Utilities, and Materials with many of the Agricultural Commodity based stocks along with Metals and mining showing far more strength than most of the beaten-down Tech names that many are betting on to rebound.  If this changes, and commodities start to wane while Tech improves, then I’ll certainly respect this. 

At present, it remains correct technically to view this as a defensive rally that likely cannot climb back to highs right away and should reverse in the near future.  While low correlation levels have provided many investors with a plethora of choices for longs regardless of sector, (and I think this continues) the markets are in need of some real help as Q1 gets set to come to a close.

See below that Energy, Utilities and Financials are the only three SPDR Select ETF’s to be positive for 2022. While this past week might have seemed constructive to most, the same groups outperformed on the week that have outperformed over the past month: Energy, Utilities, and Materials.  These remain where my high conviction long bets are concentrated.

Treasury yields now approaching 40-year channel resistance.  Can it Hold? 

This week’s big surprise was not necessarily the Equity rally (as signs of this happening started to become evident, as I discussed, in late February)  It was how rapidly rates have pushed up across the curve.

10-year Treasury yields are now at 2.50%, a level that seemed heading into this week to be important.  Based on Friday’s (3/25/22) yield surge, it would seem unlikely that this Treasury decline (Yield rally) has reached conclusion when viewing price action having seemingly gained a lot of momentum in the past few days. 

Overall, I am expecting at least some type of reaction in April for yields to pullback from current levels.  Cycles do indeed show that yields should begin to start rolling over in the weeks to come.  However, this doesn’t line up yet with either Elliott patterns, nor with DeMark weekly Exhaustion.   Thus, my call to buy TLT, at present, looks premature, and I don’t feel adding to it makes sense until there is evidence of yields starting to reverse course meaningfully.  At present, most are aware that every technician on Wall Street is looking at this same chart.  Whether that means it doesn’t work as well as usual or not, is up for discussion. 

Normally challenging a major long-term trend like this would warrant adding to duration, expecting a violent reversal in yields.  Bottom line, I’ll be watching, and yields are at a critical point that can’t be exceeded too meaningfully without setting off a more violent move that would cause yields to test 2018 peaks (prices testing 2018 lows in US 10-Year Treasuries) Bottom line, no action here, but it will pay to watch for the reversal.

Utilities confirms its breakout to new all-time highs

Interestingly enough, Utilities managed to achieve its breakout back to new all-time highs at a time when interest rates have been pushing higher aggressively.  Both XLU 0.11%  and the Equal-weighted Invesco RYU closed above intra-month peaks from February 2020 and will be set to confirm this move on a month-end close within the next week by end of quarter.

Additionally, it’s been interesting seeing this relative strength at a time when US equity indices have rallied nearly 10% within the last 10 trading sessions. (8.9% from 3/14 lows til 3/25/22 close)  (Nearly 1% gains in price per day of trading (1×1 price/time ratio)

Utilities outperformed Technology over the last week and have outperformed Tech over the last month.   Normally, defensive trading during market rallies calls for careful observation for evidence of breadth deterioration which might lead to a top, vs. chasing the rally.

Overall, this is my favorite near-term group to overweight technically for the near-term (4-6 weeks) Technical stocks to consider include: CMS 0.14% , XEL, PEG 0.43% , EXC -0.10% , DTE -0.15% , NEE -0.42% , LNT 0.00% , SO just to name a few.  Bottom line, I expect Utilities to likely continue to outperform Technology from April -June and then this to reverse in the back half of 2022.