Equity and Treasury bounce looks encouraging, and it’s likely that SPX joins QQQ in breaking out of its downtrend post NVDA earnings blowout. Given Wednesday’s Treasury rally, it appears like the short-term weakness in Equities is nearing its end as August nears its end.
NVDA’s larger than expected $16b guidance number vs. 12.5% expected for Q3 seems to suggest that AI demand remains insatiable. If After-market activity in NVDA remains intact heading into Thursday’s 8/24 session (NVDA -1.63% up 8% after-hours following earnings). it’s thought that this should further help Technology’s rally continue at a time when it’s much needed for US Equities.
Technology has rebounded sharply this week and I believe strong leadership out of large-cap Technology should further help this sector further its near-term momentum. Given Technology’s 27% weighting in SPX, this is very much seen as a short-term positive for US Equity markets.
US Treasury yields rolled over sharply on the heels of weaker than expected economic data (PMI) on Wednesday. This looks to be the start of a gradual rolling over in interest rates.
Sector leadership favored Technology and Communication Services along with Industrials on Wednesday’s interest rate plunge. If this move in rates continues, this rotation likely would gain momentum for a larger bounce into September.
At present, it’s premature to make the case for an immediate push back to new all-time highs. Momentum suffered some damage over the last few weeks along with market breadth, and this will take some time to be recouped. Furthermore, while short-term sentiment had contracted, this hasn’t been the case for longer-term sentiment measures.
Furthermore, seasonality concerns remain ongoing heading from one bearish month into the next (September) while cycles show a choppy couple months before a push back to new highs happens. For now, it’s likely that QQQ’s breakout move can carry this to $374-375 and that SPX likely will follow suit in breaking out, potentially as early as Thursday 8/24/23. The broader rally in Equal-weighted SPX and DJIA will take some time. (DJIA lagged sharply in Wednesday’s session given NKE underperformance.)
At present, despite some lingering intermediate-term concerns for the next couple months, it’s certainly an encouraging start for large-cap Technology names and for the Treasury rally which looked to be getting underway ahead of the Jackson Hole Summit.
SPX’s daily chart below shows price up against the key 4440 which intersects the 38.2% Fibonacci retracement levels of our recent decline from late July along with its ongoing downtrend. This could be broken as early as Thursday, 8/24, and movement above SPX-4440 could allow for follow-through up to 4471.
Yields show evidence of rolling over in US and Europe
2-Year Treasury note yields broke important near-term support on Wednesday which coincided with meaningful movement lower also in 5, 10 and 30-year yields.
This was the first meaningful evidence of yields dropping to coincide with recent technical warnings about technical resistance, bearish cycles and seasonality for yields along with sentiment.
I suspect that a decline in interest rates on the short and long end has gotten underway, but a true topping out in rates might take 4-6 weeks, and is truly difficult to call the bottom of a 3.5 year bear market in Treasuries to the exact day.
However, cycles call for yields to begin to fall between now and next Summer, so while some backing and filling on rates is always likely, I’m increasingly expecting that Wednesday’s lower than expected PMI data could help lower the probabilities further for a September and/or November 2023 hike. (As of Wednesday the odds of a 25 b.p. hike in November had fallen to less than 50%.)
US 2-Year yields are shown below, breaking the uptrend line over the last month. 4.90% is the first meaningful area of yield-based support, while 4.71% is a much more important structural level. Undercutting 4.71% would allow for the 2-year yield to trend down to the low 4% area into next year.
Overall, I expect that 2-year yields might trend down quicker in the near-term than long-term yields and the yield curve could steepen out even more in the weeks/months ahead (10’s-2’s curve).
Two counter-trend long ideas worth considering, if interest rates are truly beginning to peak out
- Solar Energy (TAN -0.66% )
- Medical Devices (IHI 0.09% )
Solar Energy stocks have been under extreme pressure as interest rates have lifted. While some technically strong names like FSLR -2.59% have held up remarkably well, others like SEDG 0.96% and ENPH -1.85% have been hit hard.
Importantly, this group, based on ticker symbol TAN -0.66% , the Invesco Solar Energy ETF, now shows three unconfirmed TD Sequential and/or TD Combo “13 Exhaustion” signals on daily charts.
Following the steep decline from the mid-$70’s to $55, this makes a lot of sense to consider buying dips in Solar Energy at a time when the broader Energy sector is already doing quite well performance-wise.
If rates start to pullback from late August into end of year, TAN could likely bounce back to the mid-$60’s at a minimum.
Overall, this is a counter-trend technical idea which has gotten compressed in recent weeks, and now appears like an attractive risk/reward, in my view.
No comments on IHI today, but will revisit and share charts on Flash Insight in the days ahead.
US Stocks likely show continued outperformance over Europe
One of the more interesting developments following European indices like UKX, EuroSTOXX 50, DAX, CAC-40 index having stalled out near prior peaks from 2018-2021, was the extent of outperformance in US Equities in recent months.
Relative charts of SPY 0.54% vs. FEZ -0.45% , the SPDR DJ Euro STOXX ETF show the recent rally of SPY vs FEZ since this Spring.
This consolidated for about a month lately before turning back higher to new multi-month highs again this week.
Overall, this favors US outperformance vs European Equities (as measured by FEZ for EuroSTOXX 50).
Technically speaking, I view this outperformance as a very good sign and expect US to continue outperforming Europe in the months ahead. (US PMI data came in much less negative than Europe and Germany’s PMI sank to 44, putting Germany technically in a recession.)
