Technical Strategy Video (Recorded Thursday, October 21st):

“Value-Line Breakout bullish, despite SPX hitting all-time highs on negative breadth

Key Takeaways

  • Value Line Geometric Composite breakout gives confidence that an “Everything Rally” is very much underway despite the ongoing rotation
  • SPX breakout back to new highs happened on negative breadth while 8 sectors fell on the day; Unimpressive, yet Healthcare, Cons. Discretionary strength is quite positive
  • US Treasury yields continue to scale new heights on short—end of the curve; Long-end continues to lag; Yet Financials should benefit and strengthen more into November
  • Sentiment polls show near-term bullishness creeping into the picture per AAII data; Yet, BofA Portfolio Manager survey shows persistent intermediate-term bearishness

Equal-weighted gauges of “the market” like Value Line breaking out- Value Line Geometric Avg (1700 stocks Equally-weighted) breakout to new multi-month highs gives lots of conviction that a broad-based rally is underway, despite some near-term stalling by a few sectors

“Value-Line Breakout bullish, despite SPX hitting all-time highs on negative breadth
Source: Optuma

Despite some “sector sluggishness” at all-time highs for SPX, the ongoing rotation into lagging groups is a positive!

Thursday’s gains in the indices proved to be a bit of a mirage given the decline in eight out of 11 major SPX GICS Level 1 sectors out of 11. Market breadth failed to cheer on SPX’s record gains, with negative Advance/Decline and more volume in “down” stocks vs “up”. The Dollar showed evidence of stabilizing, while Commodities fell sharply (and could be entering a period of negative seasonality) Treasury yields continued their relentless pursuit higher (Though largely in 5 and 10 year yields) and the US Dollar showed some evidence of stabilizing after a rocky couple weeks of trading. Overall, the environment for Emerging markets (EM) remains difficult technically, despite China’s recent bounce, and recent weakness in Latin America shows this area to remain under pressure technically, specifically in Brazil. An upward push in the US Dollar might cause weakness in EM into November before a larger rally gets underway.

Sector-wise, the push into groups like Transportation which had lagged substantially in recent months, and also Discretionary pushing back to new highs is certainly a positive. Below, Equal-weighted ETF’s for Discretionary by Invesco (RCD) have just hit new all-time highs after nearly five months of basing. Importantly, given little to no real weakness in this group (but merely sideways action), this push back to new highs represents a chance to overweight this group near-term for continued strength. Areas like Auto Manufacturers and Auto parts stores (discussed yesterday) remain some of the strongest sub-groups in the market right now in the near-term, and should continue to outperform. Overall, it’s thought that groups like Industrials, Materials should follow suit into November and forge their own path back to new high territory. Daily charts of RCD below.

“Value-Line Breakout bullish, despite SPX hitting all-time highs on negative breadth
Source: Trading View

Solar stocks look promising to play catch-up

Daily charts below of the Invesco Solar ETF (TAN) shows an above-average push higher to test Summer highs after languishing in consolidation in recent months. This could be the next area of Energy to start kicking into gear following the stellar performance we’ve witnessed in many of the other areas of Energy lately. Stocks like FLSR and SEDG are preferred in the space, technically, and TAN closing over 92.70 should fuel a rally into the low $100’s. Thus, given the upswing in momentum in recent days, it looks right to position long in TAN, with the idea of adding to longs on a breakout back to new monthly highs.

“Value-Line Breakout bullish, despite SPX hitting all-time highs on negative breadth
Source: Trading View

Not much resistance for 10 Year yields until Spring 2021 highs. Further yield rally likely. Finally, it’s worth pointing out that yields are not really slowing down after their recent spurt higher. We’ve now seen US 10-Year Treasury Yields jump nearly 50 bps in the last three months, while 5—year yields rose to the highest levels in more than a year. Near-term, it appears like further Treasury weakness (strength in yields) is likely which should result in Spring highs being challenged. Yet, cycles and Elliott-wave patterns suggest that further rallies in yields into November might be something to consider buying Treasuries (expecting yields to reverse back lower) and that a push above 2.00% might be far-fetched to bank on at this time. At present, this move in yields makes it right to continue favoring Financials, particularly Regional banks and the Insurance stocks (mentioned in yesterday’s report. (10-Year Treasury Yields shown below)

“Value-Line Breakout bullish, despite SPX hitting all-time highs on negative breadth
Source: Trading View

Disclosures (show)

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