Defensive outperformance and Mean reversion might be nearing a temporary end as market bounce nears

No change-Technically, our recent consolidation in US risk assets likely marks an attractive opportunity following the huge run-up into late December.  SPX has managed to alleviate near-term overbought conditions while weekly momentum and breadth remain bullish.  Trends in both US Dollar and Treasury yields remain lower despite recent bounce attempts, and an upcoming pullback in yields should coincide with Equities turning back up to test and exceed late 2023 highs.  Bottom line, this New Year’s hangover looks nearly complete.

Friday’s Jobs report failed to help Equities turn higher as expected into end of week, as yields teeter-tottered before finishing the session higher by 3 basis points (TNX).  While Yields look to be nearing resistance on this bounce, the lack of any material downturn has kept pressure on Equities which remain tightly and positively correlated to the Treasury market.

Financials and Discretionary outperformed sharply on Friday and helped to buoy the market despite another day of underperformance from Technology.  AAPL, in particular, has lagged badly since the start of the year and has been a headwind for Technology strength.  (I’ll discuss my thoughts on AAPL’s pattern next week) 

Heading into next week, there looks to be an above-average chance of Equities trying to carve out a trading bottom as yields brush up against resistance.  While it’s difficult to make the case for a rally back to highs right away, the near-term oversold conditions on hourly charts coupled with bullish seasonality and January’s cyclical positivity in Election years after early month consolidation should help the Equity market stabilize and turn higher next week.

As I discussed on CNBC Friday morning, I do not expect SPX to immediately undercut 4600. Thus, the risk/reward seems to be improving on recent Equity index consolidation and I feel that market lows should be imminent.

A few near-term Positives to mention: (Repeated from Yesterday’s note)

-RSI is no longer overbought on daily nor weekly timeframes on SPY and QQQ.

-2^nd largest SPX sector, Healthcare, has just achieved a relative breakout vs SPX

-Technology’s pullback failed to do any damage to its relative chart vs. SPX

-Trends remain lower in Yields and US Dollar which is supportive of risk assets

-Seasonality remains conducive to bullish gains

Value Line’s Geometric Index shows an Equal-weighted way of viewing 1500 US Equities, and is a more broad-based measure of market gains than viewing SPX or QQQ.

As seen below, similar to SPX and QQQ finding resistance near peaks from 2021-2022, the Value Line peaked out near former highs from July 2023, February 2023, and Fall 2022.

Thus, a stalling out in January 2024 shouldn’t have come as much surprise, and I had written extensively about reasons for a pullback getting underway back in December 2023.

Following this past week’s decline, prices are attractive technically at a time when weekly momentum remains positively sloped.  Thus, the risk/reward should be improving in the short run at a time when many have gotten abnormally worried about Technology stocks.

Value Line’s Geometric Index

Treasury yields look close to peaking after minor bounce

Overall, I don’t view the recent bounce in Treasury yields as being that meaningful, and following five of the last six days of Yield gains, TNX looks to be nearing a temporary peak which should give way to a rally in prices (decline in yields) in the next 1-2 weeks.

While the breakout of the downtrend from last October is likely important towards why yields might push up again in February, this first move higher in yields looks complete. 

TNX daily charts shows yields having rallied to a meaningful level of Ichimoku resistance, and this level near 4.03%, likely should result in yields starting to retreat next week.

10Y Yield

Performance shows mostly defensive strength, while Technology has faltered

Looking at performance of the past week, XLV managed to outperform all other SPDR S&P ETF’s while XLU, XLE and XLP all turned in positive performance.

However, in Equal-weighted terms, only Utilities showed positive performance (RSPU 0.08% ) while all other 10 Equal-weighted sector ETFs were negative.

Technology, Consumer Discretionary, and Industrials lagged performance and all three sectors fell 3% or greater (in Equal-weighted terms).

Given my expectations of a possible bottoming out in the Stock market next week along with a short-term bottom in Treasuries (high in Yields) I expect that Tech and Industrials likely should begin a comeback, which might start next week.

Sector ETF Performance

Bitcoin Miners have begun to outperform Equal-weighted S&P 500

Given next week’s window for a possible Spot Bitcoin ETF announcement (per Fundstrat’s Digital Currency team) we’ve seen some dramatic outperformance lately out of the Bitcoin mining issues.

This ratio chart of WGMI (Valkyrie Bitcoin Mining ETF) vs. RSP 0.10%  (Equal-weighted S&P 500 has officially broken out of the lengthy triangle consolidation pattern relative to the S&P in Equal-weighted terms, as of two weeks ago.

Additional outperformance looks likely out of many of the Bitcoin Mining names, and WGMI is likely to outperform in the weeks to come.

The timeframe for additional relative strength is centered on the next three weeks, which also coincides with a time when many Cryptocurrencies might produce a turning point (potentially into the end of January).

My thinking is that any upcoming turning point might be a high cyclically given the Bitcoin cycle composite, which peaks in late January and turns down into April.  At present, most of the patterns in the Bitcoin mining issues remain quite positive, and I expect that the next few weeks should bring about some above-average relative strength before this space hits resistance.  Bottom line, I like favoring WGMI for above-average relative strength vs. the S&P 500 in January.

Valkyrie Bitcoin Mining ETF / Equal-weighted S&P 500 Ratio