US indices are growing closer to meaningful lows, and this involves a combination of bearish sentiment, out-sized selling pressure/downside volume, cycles projecting lows in late June, some outperformance in Growth stocks and some gauges of oversold conditions that are close to levels that marked bottoms back in 2016 and 2018. In the short run, Friday’s stabilization might lead to some brief follow-through into next Tuesday. However, after 10 of 11 weeks lower (which hasn’t been seen in 50 years) it’s going to be imperative to start making higher highs and higher lows. While oversimplistic, the rally attempts in recent weeks haven’t proven nearly strong enough to break downtrends, but outside of price, there remain credible reasons to expect an end to this selling is right around the corner. Look to buy dips at 3505-3600 into end of month.
Reasons for optimism that a low is near
Overall, while a bottom to this year’s Equity selloff looks to be near, it’s important to reiterate that this is a process. Following a 25%-30% decline (SPX and NDX), it’s tough to call “The Bottom” while far easier to find reasons to proclaim “A bottom is near”. However, I suspect we are close for the following reasons:
Rates and US Dollar look close to peaking out– The rise in both coincided with stocks weakening and particularly real rates screaming higher. Now 30yr yields lie right at 2018 peaks and evidence of a bit of upside exhaustion is present, when eyeing DeMark’s counter-trend indicators like TD Sequential and TD Combo. Treasury sentiment has grown quite bearish and yields are overbought.
Note, rates rolling over might happen sooner than a US Dollar decline. The latter might be postponed until after the July rate hike, given the BOJ’s willingness to “stand pat” on its policies, despite massive rate differentials. PERCEPTION OF FED continuing to hike as economy cools will start to reverse. Market could be in a sweet spot to rally as Fed takes foot off of accelerator.
Sector rotation has begun that seems quite interesting– “FAANG” has begun to outperform this past week. AAPL, MSFT, GOOGL, AMZN, NFLX down 3-5% but SPX, QQQ fell 9-10%. Also, Energy is also starting to rollover, having sold off sharply this past week. Moreover, ratios of Growth vs Value have now started to improve, and these sector shifts are often important to pay attention to. Finally, groups like Utilities, which would ordinarily be thought to outperform during periods of downside volatility, have been weakening.
Sentiment which has been bearish, is starting to grow even more negative, while capitulation remains a bit early…
- Finally some overbalance of selling has occurred in the past week, with TRIN (Arms index) showing 2 readings over 3.50 this week (this happened right at May 10 lows)
- Equity put/call is nearly at levels seen in March 2020
- Advance/Decline has broken down to lowest levels since last summer
- Only 2% of all SPX issues are above their 50-day moving averages and only 11% of issues above 200-day, nearly 90% below!! This is extreme!
- VIX backwardation is present, though still not too severe. Ideally markets will show Spot VIX at least 5 percentage points, if not 10, above 2nd and 3rd month Futures contracts.
- Positive momentum and breadth divergence has begun with fewer stocks hitting new 52-week lows
- My cycle composites which have been accurate all year point to a June/July bottom
Overall, real technical proof will come from prices starting to make higher highs and higher lows, but that takes a move above 4200! At present, markets are close, and a final capitulatory wave likely plays out during the final week of June, which should bottom out near 3500.
Furthermore, while an initial bottom might happen into late June, it’s likely that markets could still prove to be quite choppy until post-July expiration and the scheduled 2nd 75 bp. rate hike. This might result in the US Dollar rolling over, providing a tailwind for growth to kick back into gear along with stocks rallying into September.
Overall, the character of this decline is much different now this week than a few weeks prior. One should take note of these extreme readings discussed above, and expect that a more substantial low is growing closer.
Below we see the percentage of stocks greater than their 50-day moving average has dropped to under 2% for SPX members. This is quite compressed and has only been seen a handful of times over the years.
Crude’s weakness has accelerated this week, suggesting more pullbacks lie in store
Energy’s weakness over this past week has proven even more extreme than I anticipated early in the week. Crude’s break of its one-month uptrend gave initial proof that prices should weaken in the short run.
Sector-wise, Energy has proven to be the weakest of all the major S&P SPDR ETF’s this past week, with a one-week return of -18.39% for RYE, the Invesco Equal-weighted Energy ETF (5-day percentage return through 6/17/22.) XLE 0.32% was not much better, despite its heavy weightings in XOM and CVX. This finished down -17% for the rolling 5-day period.
Front month WTI Crude futures look to have strong support near $105. This would be the initial level to consider buying dips for a trading bounce. However, given the first decline to new weekly four-week low closes for 2022, the momentum has begun to turn negative rather quickly. Thus, it’s important to watch bounces carefully for any signs of them unfolding as a three-wave move. This in turn would lead to another three or five-wave decline for WTI Crude, which I expect would result in a more lengthy decline and test May lows. At present, it looks early to buy dips in Energy, but I’ll discuss as this gets closer in the days/weeks to come.
Copper looks to be turning down sharply
Given some evidence of a few pieces of economic data coming in weaker in recent weeks as the FOMC has engineered its first 75 bp rate hike this year, all eyes are on Copper to understand whether this weakness might persist. Furthermore, given its leading tendencies, there remain questions as to whether Copper’s pullback suggests that economic conditions are starting to deteriorate in a more meaningful fashion.
Daily Copper charts show front month futures contracts in Copper having closed at the lowest levels since last spring. That’s a huge decline in a short period of time. A few conclusions:
This decline has played out as an impulsive five-wave decline at present and doesn’t look complete. My expectation is for Copper to fall to $3.50-$3.75 before this bottoms out.
Second, the fact that prior lows were just taken out today (Friday 6/17) means that more immediate weakness is highly likely into next week. Thus, this pullback is not something to consider buying into just yet, and likely extends. This could have bearish implications for stocks like Freeport McMoran FCX 0.94% , and I expect this weakens into July.
Overall, the relentless rise in the US Dollar seems to be affecting not only precious metals lately but also is having a detrimental effect on many base metals. While a peak in DXY might happen into July, at present this seems early. Thus, Copper should weaken further in the weeks ahead.
