SPX and QQQ look to have bottomed and should resume their push up to new all-time highs into August. Bond yields have broken down sharply on the dovish Fed, and US Dollar looks to be “next in line” to break down to new monthly lows. Small-caps underperformed in recent days, but still look more attractive than Large-caps for outperformance over the next 3-5 weeks. Technology strength has been helpful this week, but it’s the breakout to new highs in Industrials and Financials strength that seems important to concentrate on. Overall, I am expecting that Wednesday’s gains set the stage for a push back to new all-time highs, and SPX should not undercut 5400 in the near future.
Big technical movement across Equities, Treasuries and FX on Wednesday coinciding with important policy shifts out of the BOJ while FOMC changed its wording to appear more dovish.
S&P and QQQ both rocketed higher to take out last week’s highs, which arguably bodes well for additional gains in the month of August.
While some “backing and filling” could certainly happen in the near-term given the massive move in Equities on Wednesday, it’s highly likely at this point that lows to the recent decline from mid-July are in place.
Furthermore, this rapid rebound in Technology is certainly helpful for US Equity indices and for the broader risk landscape.
Industrials managed to push back to new all-time highs, while Financials moved to the highest levels since early 2022. Both Utilities and Communication Services broke out to new high territory for 2024, while Healthcare looks to be on the verge of a possible multi-year breakout.
Overall, I believe that Wednesday’s gains set the stage for a coming push higher back to new all-time high territory. Pullbacks, if/when they occur into Thursday likely prove short-lived and make SPX appealing from a risk/reward perspective.
Given that SPX managed to push above highs of the last week I find a move back down under 5400 unlikely in the near future. Thus, 5400 becomes the new “line in the sand” while upward progress to test and exceed July peaks at 5669.67 looks probable.
S&P 500 E-mini Futures
Treasury Yield breakdown has begun to accelerate and now TNX should test December 2023 lows
US Treasury yields (^TNX 1.13% ) are falling sharply across the curve which can often happen during FOMC weeks, but the combination of this being the last business day of the month could fuel positioning needs for Indexers. Additionally, Treasuries could have gotten a boost from USDJPY given Japan’s policy shift.
As discussed this morning, labor costs declining, coupled with US Treasury refunding holding steady and weaker economic data while USDJPY plunges are all bullish for Treasuries.
Technically, Wednesday’s price action was very negative on a yield basis (very bullish for Treasuries) I anticipate a break of TNX-4.00% in the weeks ahead, and the most meaningful downside target for ^TNX 1.13% lies near 3.78% lining up with late December 2023 lows.
TLT longs look appealing with targets in high 90s near 100.
US Government Bonds 10 YR Yield
US Dollar weakness likely kicks off a pullback to new monthly lows into August
While the US Dollar move wasn’t widely discussed Wednesday, outside of the strength in the Japanese Yen, this looks to be a near-term technical breakdown in DXY that should allow this to break back lower to new monthly lows.
As discussed in Wednesday’s Flash Insights, BOJ raised its benchmark rate and unveiled plans to cut bond purchases in half. This is a substantial shift in policy where policymakers are putting greater weight on longer-term inflation projections. JPM estimates that 40% of carry trades have been unwound in recent weeks, and the largest retreat in bets against the Yen since 2011.
USDJPY has shown further weakness, undercutting support and no real support now until 148.50, but today’s huge high to low range and USDJPY extending losses to lows of its daily range is quite bearish for Dollar/Yen technically in the short run (Bullish for Yen gains).
US Dollar index (DXY) meanwhile, appears likely to test and undercut July lows at $103.65 which should drive this lower to $102.35, then $101.41 in the short run.
DXY showed the start of a meaningful pullback in the Dollar, and while the intermediate-term prospects are bright, it could show further weakness into this Fall and then between Election time and next Spring before it bottoms and turns back higher.
US Dollar Index
Small caps look ready for next push higher; IWM target initially should be $244
This week’s FOMC meeting coincided with a decent push back into Growth and large-cap Technology, as Small-caps consolidated relative to Large-caps after a sharp three week push that resulted in the multi-year breakout.
Overall, despite the rapid comeback in Technology over the last 24 hours, along with Wednesday’s post-close earnings success from QCOM -1.15% and META -1.74% which might allow for additional strength on Thursday, it looks right to favor Small-caps over SPY in the weeks ahead.
This weekly chart shows this week’s mild consolidation in the relative chart of IWM -0.69% vs RSP -0.78% but this doesn’t take away from the attractiveness of Small-caps by any means.
IWM should be overweighted vs SPY and additional absolute strength in IWM should allow this to push higher to test $244. Thus, I believe it’s wrong to extrapolate Wednesday’s mild performance into thinking this will be the start of any kind of mean reversion back lower in Small-caps. This remains the preferred style of choice heading into August.
IWM vs RSP
