Defensive technical strength is meaningful amidst ongoing Divergences

Technical Strategy Video:

Key Takeaways

• Intermarket divergences remain something to watch carefully as markets continue to grind sideways, with SPX largely unchanged from six trading days ago
• Defensive groups like Consumer Staples and REITS have shown some of the best performance amidst the S&P SPDR ETF’s over the last 1 and 3 month periods.   Technically these groups along with Utilities are ones to favor in the short run
• Treasuries look to be 1-2 days from bottoming out, which should coincide with yields turning back lower, after one of the toughest starts to the year for Treasuries in more than a decade.   

US Equity markets remain in a state of flux for 2022, which is a source of frustration to bulls and bears alike as SPX remains largely unchanged over the last six trading days.   The negative divergence seen in the NASDAQ, however, remains important to pay attention to in the short run, and Tuesday saw prices finish under the lows of the last six trading days.  While many are citing the positive 1.5% return over the “Santa Claus rally” period as a seasonal positive, it will be important to resolve these divergences that are seen as a larger negative to progress right now.  Most of Europe is trading up near key resistance, as are sectors like Financials and Energy.

Key Technical Takeaways in the Short run

• Nasdaq, DJ Transports, Small-Cap IWM still negatively diverging with SPX
• Defensive Technical strength remains impressive, with Staples breakout to new all-time highs likely to be followed by Utilities in the next 1-2 weeks
• Treasury weakness nearing support/Yields nearing resistance and expect a reversal
• US Dollar showing evidence of turning back higher. Rally likely into February
• Most of Europe, specifically DAX, and EuroStoxx50, nearing prominent highs
• China’s FXI turning down sharply which could weaken into late January before bottoming
• Financials and Energy stoking a Value tilt, but both sectors nearing resistance
• Implied volatility looks ripe to bottom out, and VIX rally into late January likely

Specifically, the DAX hourly chart, shown below, gives some reason for “pause” when expecting this recent rally for Europe would continue much further.  Specifically, from an Elliott-wave perspective, it’s interesting to note that DAX’s initial rally from late November was very much a three-wave move.  (This gives some major clues that the entire bounce from Nov 2021 could be vulnerable to being reversed over the next 4-6 weeks, as opposed to a five wave push back to highs)  My thinking of how this Elliott-wave structure is unfolding is shown below.  A 3-3-5 Flat pattern has emerged which should be near completion, just as DAX has come within striking distance of all-time highs.   Given the fairly positive correlation between DAX and SPX, one should pay close attention to the DAX, specifically if/when this undercuts 15834.

Treasuries look to be closing in on support  

Another interesting dynamic has been playing out that concerns Treasuries, which as discussed yesterday, have kicked off the year with one of the worst starts in over a decade.  TLT, the Ishares 20+ year Treasury Bond ETF, is now within striking distance of October 2021 lows.  This looks even more important when seeing that DeMark’s TD Buy Setup pattern could be complete on daily charts sometime this week, and potentially in place by tomorrow (Not shown)  Financials have certainly benefitted of late with the backup in yields and the steepening in the yield curve.  However, that could be apt to reverse along with yields in the days ahead.  I”ll discuss the Financials prospects in greater detail in my 1/20/22 Yearly Outlook.  For now, I suspect it’s right to steer away from this group given negative weekly momentum just as XLF and RYF are nearing former November 2021 peaks.   I expect TLT likely should bottom out sometime this week, so buying TLT looks to be an attractive way of playing a reversal in Yields.

Defensive strength remains impressive technically and not something to fade right away given how meaningfully many of these groups have outperformed in the last month.   Consumer Staples and REITS have both generated three-month returns in excess of 10% which beats the SPX and Staples is the top performing S&P SPDR ETF in the rolling 1 month period, returning +8.45% in performance through 1/4/22. 

As seen in the daily chart below of the Equal-weighted Staples ETF by Invesco, “RHS”, the gains really began to accelerate once June 2021 peaks were exceeded, pushing RHS back to new all-time highs.  While stretched, this remains the best of the Defensive groups right now (Though I suspect Utilities is on the verge of joining in moving back to new all-time highs in the weeks to come)  

Stocks like Constellation Brands (STZ) have just made three-year Cup and Handle breakouts back to new all-time highs, and is currently one of the more attractive stocks to consider in this group on an intermediate-term basis technically.   Coca-Cola (KO0.58% ) also is just in the process of pushing above 2020 peaks and I suspect this might also benefit from a breakout which could cause prices to show further acceleration higher.   CL and ADM are also favorites of mine within the Staples group technically as both are on the verge of breaking out and I expect this happens in the days/weeks to come.

EL, COST, PG, and HSY remain at all-time highs and stretched, though no evidence of these turning down and additional gains look likely for these as well. 

Overall, this chart of RHS is a good illustration of a recent breakout in this group which has caused many “household” names to show excellent technical strength.   This should be a group to pay attention to in the weeks to come, and I expect 1H 2022 outperformance out of the Staples.

Invesco Consumer Staples ETF