The near-term pattern continues to show choppiness, and SPX has not broken out, nor broken down in a meaningful way that would suggest any sort of clarity in near-term direction. If anything, this sideways action in Equity indices in the wake of Treasury yields pressing higher over the last six of eight trading days seems pretty resilient, to say the least.
While short-term breadth gauges have softened a bit over the last week with the Equity stallout, SPX still has nearly 70% of all issues above their respective 200-day moving averages.
Semiconductors remain a very strong part of the US Equity market in the near-term and the best part of Technology. Meanwhile, there hasn’t been any real sign of defensive outperformance. Technology outperformed Utilities on Tuesday, and both Staples and REITS lagged sharply behind all other sectors.
As mentioned, it will be important for SPX to exceed 4176 to think an imminent push to test and exceed 4250 is underway. Conversely, undercutting last Friday’s lows just above 4060 would result in consolidation into next week before rallies can get back underway.
As discussed later in this report, February tends to have a far better track record in pre-election years than non pre-election years. However, most of the strength happens in the first part of the month before late month consolidation. Bottom line, until 4176 can be exceeded, there still stands a chance for late month weakness. Overall, this should prove to be buyable as I expect pullbacks to prove short-lived and minor in scope, with 3900 likely not being undercut in February.
February pre-election year seasonality helps to explain some of the recent resiliency
As this table shows below, February is not always the laggard month that investors have come to expect. Specifically, pre-election Februaries have historically been quite positive over the years vs. non-pre-election years.
The average return has been +0.9% during pre-election year Februaries since 1871, vs a -0.4% negative monthly return during all non pre-election year Februaries.
Despite some choppiness over the last week, February thus far has been positive, and I expect that any minor weakness should still be buyable and turn higher to test and exceed SPX 4250 into March.
As shown yesterday, Treasury yields cycle composites start to turn down during the last week of February and move lower into late March/early April. That should be bullish for Equities over the next month.
While the 10-, 20-, and 60-year historical cycles all show possible choppiness into late February, all of these former years turn up sharply into mid-March, with the 60-year getting a late start due to its weakening into 3/1. (Since the 60-year cycle (1962) proved to be quite accurate last year as a roadmap for 2022, it might be prudent to not count out the influence of 1963’s influence as a mid-term election year on 2023 given the pre-election cycle.
Bottom line, seven of the last 10 pre-election year Februaries have been positive. There isn’t much technical evidence thus far that February won’t turn out to be positive again, unless 3900 is broken, which I don’t expect.
This table below highlights pre-election year seasonality month-by-month.
Pre-election year Februaries suffer from late month weakness
Seasonally speaking, the back half of February tends to be much worse than the front part, based on data going back since 1929.
When looking at all Pre-election Februaries for a guide as to how the month might play out, we see that the first part of the month has been quite a bit stronger.
This year could be similar, as early gains now look to be stalling out a bit. Yet, there hasn’t been evidence of prices turning down sharply.
Overall, prices tend to be strong into the 11th trading day of the month. However, it seems as if day 14 into 19 tend to be the weakest. This lines up with next week.
Initial support at 4060-SPX, if broken, would suggest this late month weakness is beginning to play out. However, it’s doubtful at this point that 3900 will be breached. Thus, any minor drawdown in SPX should be buyable into the final week of February.
10-Year real yields breaking out
Interestingly enough, this daily chart of 10-year “real yields” has officially exceeded the minor downtrend which held the bounce on the move into early January.
This recent uptick does look to be a negative for precious and base metals. However, regional banks have not experienced the same kind of bounce that normally happens with a push back higher in yields.
Overall, I expect this to produce a short-term rally only before stalling out and turning back lower. Yet, Tuesday’s success in exceeding this downtrend is clearly positive for real yields technically speaking.
