Technical Strategy Video:
Key Takeaways
- US Equities and Treasuries selling off in unison proves to be a difficult start for 2022, with collective losses averaging 6%
- Sector Dispersion has been dramatic thus far, with very positive returns out of Energy and Financials in aiding the Value trade, while Technology has withered
- US 10-Year Yields continuing to push higher and suggest our recent Value outperformance likely has further to go, while Growth could weaken further into January expiration.
It’s proven to be an interesting start to 2022. Equity markets have shown mild losses, though much of this has been concentrated in Technology, Healthcare and REITS. Meanwhile, Financials and Energy have been advancing steadily back to new all-time highs. Markets likely won’t suffer extreme downside volatility while Financials and Energy are trending higher, so watching these carefully into next week will be important. QQQ charts below show prices down to true “make-or-Break” territory after a tough -4.5% decline this week. Any decline under mid-December 2021 lows of 377.47 is an automatic stop for trading longs, as this would make this vulnerable to a pullback down to 364.12. Overall, QQQ is an important gauge to keep a close eye on in the week(s) to come, given its outsized Technology composition.
Sector Dispersion has been really extreme to kick off the new year with gains of over 10% for Energy in the rolling 1 week period and over 5% in Financials. Meanwhile, three groups: Technology, Healthcare, and REITS have all lost more than 4%. Given the lack of upside trend exhaustion for both Banks and Energy just yet, it’s likely that this dispersion will grow even wider next week.
Technology showing evidence of breaking trends vs SPX in relative terms
This daily ratio chart of Equal-weighted Technology (RYT) vs SPX has officially broken an eight-month uptrend going back since last May as of Friday 1/7/21 close. This looks bearish for Technology in the short run, and likely leads this group down further into the back half of January. Given that Technology still represents the highest weighting in SPX, this likely will cause further weakness in SPX, which might challenge December 2021 lows.
Software has borne the brunt of the selling in recent weeks, with IGV 0.85% having violated a multi-month Head and Shoulders pattern and steadily weakened. The S&P Software and Services Index turned in the worst weekly performance of any of the S&P GICS Level 2 sectors this past week, with returns of -5.59%, while Tech Hardware and Semiconductor stocks showed relatively “less bad” performance with returns of -3.31% and -2.32% respectively.
Regional Banks remain an area of outperformance and should still be favored in the weeks ahead.
This recent Treasury decline (Yield rise) has stoked an impressive rally in the Banks, and regional banks in particular have proven to be one of the better parts of all of Financials.
Daily charts of SPDR S&P Regional Banking ETF (KRE -0.20% ) show prices just breaking back out again to new all-time highs, and looks likely to show further gains up to $80 into next week. Technically speaking, this would equate to an 100% equivalent move, price wise, of the first rally up from last Fall’s lows. Overall, stocks like NTRS, PNC, KEY, HBAN, and RF are some of the top stocks within this sub-sector of Financials and should be favored as areas of outperformance as this Regional bank relative strength continues.
