Treasuries still early to buy
Key Takeaways
- Monday’s break to multi-day lows throws the rally prospects in doubt – Trends remain bearish and momentum is not oversold
- Treasury yields still look to push higher into late April as positioning doesn’t yet favor a pullback in yields
- Energy still a preferred area to favor and no real evidence of deterioration
The attempted stabilization in US Equities has certainly not led to much rally in recent days. While prices earlier in Monday’s session at 4408 were roughly in line with where last Monday’s trading closed (SPX-4412.54 from 4/11/22), the reversal back lower Monday down to new multi-day lows is not a technical positive. Overall, movement down under 4342 would violate the 61.8% Fibonacci retracement zone of the entire March rally, raising the probability of an immediate retest of February/March lows. Technically speaking, recovering immediately is a necessity towards thinking even a bounce to 4500-4520 can happen which is looking increasingly more unlikely. Overall, the thoughts that February lows should be tested before SPX pushes back above 4637 remains intact, and defensive sectors should be favored.
Treasuries likely can bottom out by early May but lows remain premature for now
Yields have continued to press higher over the last week with little to no real reversal. Technically speaking, I expect TNX to climb to 3% or even a bit higher to 3.20% before reversing course while German Bund yields might get to 1%.
However, cycles tend to show a rolling over in yields in the weeks ahead and based on exhaustion counts possibly lining up on DeMark’s TD Sequential and TD Combo indicators, that very well could materialize by end of month. This could give us buy signals for Treasuries as cycles, DeMark and sentiment turn bearish at exactly the same time and Treasuries start to lift next month.
However, this looks early for now, and weekly charts of TLT the Ishares 20+ year Treasury bond ETF likely pulls back from its current $120.15 to near $115 before this can officially bottom out. Technically the area near 2018 lows looks quite important, and I’m expecting this holds on further weakness into late April/May.
Interestingly enough, CFTC data has shown Non-Commercial Futures positioning to have gotten less bearish for two consecutive weeks. This is interesting, as it appears like those that have attempted to turn bullish on Treasuries are premature. My view is that this is still early for Treasuries to bottom and DeMark counts on TLT on weekly charts have not yet shown exhaustion (but could do so in the next 3-4 weeks) Thus, trends remain negative for Treasuries (positive for yields) and likely continue to trend lower into late April before a meaningful low.
OIH Strength likely extends up to $325 before any short-term peak
Interestingly enough, the recent Energy sector strength looks to be stronger than WTI Crude, which is exactly opposite what had been happening late last year into early 2022. Many investors commented that WTI Crude was advancing to the highest levels since 2008 while VanEck Oil Services ETF (OIH) remained quite compressed, relatively speaking. Stocks like SLB 0.23% and HAL 0.32% which make up 40% of OIH remained well off highs seen back in 2014.
Now this seems to be changing. Field Services and Drillers have begun to finally participate, and OIH has just broken out to the highest levels since 2019 while WTI Crude remains under March 2022 peaks.
Technically speaking, I discussed the shift from XLE to XOP as well as the outperformance in OIH vs XLE which looked likely to continue. This week’s breakout in OIH does look important and positive in helping Energy extend at a time when many have begun to doubt that Energy can continue to outperform.
While I agree that Energy likely should near a temporary peak within a month’s time and might consolidate as WTI Crude pulls back temporarily back to the mid-$80’s this looks premature for now, and OIH should be able to climb up to near $325 with likely maximum targets at $340.
Overall this bullish breakout in OIH 0.17% is constructive & should lead higher near-term
Weekly WTI Cycles show a bearish bias into October before turning back sharply higher
Cyclically there does seem to be some selling pressure in WTI Crude from May into October of this year before turning back higher into next Spring/Summer of 2023. Weekly cycles which have proven quite accurate over the last dozen years showed the first 10 months of this year to be negative.
However, the daily cycles press up into May of this year before rolling over and joining the weekly. Bottom line, one should expect that Energy likely can tactically peak out in late Spring and weaken into late Summer/Fall before turning back higher.
At present, it looks right to favor Energy on an intermediate-term long-term strategic basis. However, those who are more tactical might begin looking for exits in May. I’ll concentrate on the daily cycles more closely in the weeks ahead when more evidence of a peak arises. At present, this is more of a short-term warning sign than a long-term which might bring about weakness into Q3. However, it’s still likely that WTI Crude pushes back up to new highs after any weakness in the months ahead. Therefore, weakness should prove to be something to buy into and not something that is ultimately a meaningful peak.
