Key Takeaways
- Wednesday’s about-face in US Equities seemed constructive; yet, more work needs to be done to have conviction in indices turning higher given ongoing negative momentum and price structure.
- Yield curve technicals remain quite negative, but don’t necessarily suggest immediate decline to inversion territory.
- Treasury yields look to turn back lower in the month of March, which could happen either directly following the FOMC meeting, or in late March.
An encouraging intra-day reversal in US stocks left prices in positive territory by Wednesday’s close, but as discussed, patterns remain largely range-bound and volatility has picked up. More is needed technically speaking to trust that stocks are headed back to highs, which in the case of SPX requires a move back over 4590 on a closing basis. Given lackluster recovery efforts, bearish near-term cycles, and challenging short-term technical structure, it’s important to keep a close eye on prices and what’s participating. Overall, while upward progress is expected into March’s FOMC meeting, stock indices certainly have some work to do, to gain technical conviction.
Technically, Treasury yields could be nearing a peak by March FOMC
The combination in near-term overbought conditions along with cyclical projections, long-term bearish channel resistance, and DeMark exhaustion all seem to suggest this recent push higher in yields likely won’t be able to progress throughout 2022.
Daily TNX charts show this recent acceleration higher in yields, which is ongoing and has shown little to no evidence of reversing course. However, Fibonacci projections of the yield rally from last summer seem to center on 2.20% as being important. Thus, a further push up would likely encounter strong overhead resistance there. Additionally, long-term downtrend channels for TNX show the area just below 2.30% also as having some major significance in likely causing some resistance to the recent push higher in yields.
Thus, it’s expected that the risk/reward for being short Treasuries is starting to look unappealing in the near-term. Any further acceleration should be expected to represent an excellent risk/reward opportunity for buying dips in TLT 0.49% and this might materialize right near prior lows from last Spring. Anniversaries are always important to focus on technically, and if prices are anywhere $133-133.50 into mid-March, I believe this would coincide with a big reversal back higher in price (lower in Yields)
Flattening in the Yield curve shows the 2s/10’s curve down at .40 bps, lower by over 110 bps in the last 11 months. This long-term 40-year chart of 2’s-10’s shows two things of interest. The first is the generally limited time that the yield curve has been inverted over the last 20 years without steepening back higher. Second, recessions (shown in Grey) have preceded the past five inversions by around 6-12 months. Thus, while there’s no guarantee that the curve will definitely invert this year and maybe unlikely) trends remain quite negative for now and have not shown evidence of turning higher.
When running my cycle composite on weekly Treasury yield cycles for the US 10-year yield, it shows rates likely to peak out this year and turn down into late 2023. This involves combining weekly cycles with lengths of 195 weeks with harmonically related 100 week and 64-week cycles and has given a good degree of success in years past in pinpointing highs and lows for yields. While the short-term progression for rates remains tilted to the upside into March, it’s thought that Post FOMC, Treasuries might begin to rally again, (Meaning yields reverse their recent upside climb and turn lower) We’ll see if this turns out to be correct, but a few DeMark related TD Countdown 13 signals are close to appearing on 10 and 30-year yield charts which might suggest this recent bump in yields proves short-lived.
Daily cycles also line up with what the weekly are saying on yields likely reversing, and when studying the composite that includes cycle lengths of 246, 177, and 124 trading days (which seem to have high strength scores, and have correctly predicted highs and lows in yield terms with fairly good accuracy in years past, these seem to show an upcoming peak for yield in the month of March, followed by extreme weakness lower into June. I’ll leave it to the economists to explain what kind of a policy mistake might occur at the March FOMC Meeting, but my view is that yields likely peak out within the next 4-6 weeks.
