This week’s bounce has now carried SPX up 1% again, now its fourth consecutive day of 1% gains, and prices have moved right near the 50% retracement of the entire decline from early January. While this rally was expected based on cycles into the March FOMC meeting, it’s difficult to chase gains above 4450 given intra—day overbought conditions. Structurally this rally has broken above early March highs, which was thought to be a positive. However, a few challenges remain that I’ll discuss which make it important to not give back too much of these gains on consolidation next week. Overall, it looks right to still favor defensive sectors along with commodities and Bonds vs chasing stocks on this first big bounce off the lows.
Technical Developments over the last few days
Stocks have rebounded sharply over these last few days and volume was extraordinarily heavy as Triple-Witching Expiration Friday has come to a close. There were rumors of over 3.5 trillion in options expiring, the most in nearly three years to mark the end of an important Fed week.
Daily momentum has turned back to positive, while weekly and monthly momentum, as per MACD, remain negative.
Treasury yields dropped sharply post Fed meeting, and the yield curve flattened out even more, with 2s-10s spread dropping under 20 bps to close the week.
US Dollar looks to have turned lower, though has not broken support to suggest a larger decline is upon us just yet.
Financials were the best performing of the major SPX GICS Level 1 groups, along with Healthcare and Discretionary, the latter largely led by Retail.
Digging a bit deeper, the largest SPX GICS Level 2 groups were led by Airlines, Consumer Finance names and Auto Components, three groups which remain down between 7 to 18% over the rolling one-month period. So, some definite evidence of laggards bouncing.
Defensive strength remains very much a part of this market, and even after our strong Equity index bounce this past week, Energy, Healthcare, Utilities and REITS are the top performing S&P Sector SPDR ETF’s over a rolling one-month period.
Growth bounced vs Value as Technology gained over 7% on the week while Energy fell nearly 4%. This proved to be a direct flip-flop of exactly what had been working over the last month.
REITS look to have broken out relatively vs SPX out of multi-year long bases, while Utilities just missed achieving their highest all-time weekly high close.
Commodities consolidated gains as Energy, Metals, and Grains all dropped in trading. However, commodities look attractive to favor after this pullback, particularly the base and precious metals along with Grains. Soft commodities like Cotton are particularly bullish near-term.
Below is a chart I discussed in yesterday’s Technical Video, highlighting the Equal-weighted GSCI index for Commodities relative to the SPX. As can be seen, Commodities broke out sharply on a relative basis to levels not seen for the last seven years. While stretched, this outperformance is expected to persist this year. Thus, any rolling over in commodities between April and July should prove to be a buying opportunity.
What needs to happen to gain conviction in this rally?
Weekly Momentum, per MACD should start to turn more positive and experience a bullish crossover back over the Signal line. This would be a decisively positive sign.
Stock indices like NASDAQ, DJIA, SPX need to get back over the 50% retracement areas of their January decline.
Breadth needs to expand more aggressively than has happened thus far. At present, less than 46% of all SPX issues are above their 200-day moving averages (m.a.) and less than 50% (49% as of mid-day 3/18/22) were above their 50-day m.a.
Technology needs to recoup its relative trendline vs SPX that was broken a few weeks ago. Stocks like AAPL remain in absolute downtrends from February peaks and while Growth bounced vs Value this past week, larger trends in Growth vs Value were broken a few weeks ago when looking at Large-Cap, Mid-Cap and Small-cap that make trusting this Growth bounce still a bit difficult.
Defensive sectors should start to lag and turn lower relatively. Thus far, despite some brief underperformance in Food Stocks within Staples post the Russian invasion, we’ve actually seen impressive strength and outperformance out of the Defensive groups, particularly REITS and Utilities.
Overall, I don’t think its wrong to trust this bounce until it gives us a reason not to trust it, but breadth, weekly momentum and cycles aren’t on our side to suggest an immediate push back to new highs. Cycles, in particular, (as will be shown below, paint a rather grim picture) and our rally this week seemed to consist of weaker groups bouncing from oversold levels, not true quality. As suggested in recent reports and my latest video, I like taking some risk off the table on this bounce and diversifying into Commodities like Copper, Gold, Silver, Cotton, along with buying Treasuries, as yields have pushed up to unattractive risk/reward areas to be short. Furthermore, Uranium looks quite appealing given the US pledge to accelerate aid for current and future US nuclear reactors. SPX has key support now at 4300, so any move under that level would stop out trading longs, allowing for a move down to test recent lows.
Interestingly enough, hourly charts of the QQQ now show TD Sequential and TD Combo Sell signals (13 Countdown) right as prices successfully made the highest close for the month of March. While not wishing to ignore this week’s progress, it does look to require consolidation next week after this runup. These hourly charts can often help to identify short-term peaks and troughs for those wishing to capture these turns. Prior lows in January, February and early March 2022 all coincided with exhaustion signals per DeMark’s indicators.
Cycles don’t paint a bullish picture between now and July While it’s right to stress the positives this week, it’s always important to also consider what might go wrong. Given that my composite of Gann’s Mass Pressure Index has been “on the money” over the last year, it’s important to see what this is saying about the weeks and months ahead. As detailed in early March, this painted a bullish picture of the period heading into this past week’s FOMC meeting. It’s been correct this year in forecasting a “down” January, a choppy February, followed by a rally into mid-March. This now turns lower into mid-April and generally calls for lower prices into the Summer. While this doesn’t have to necessarily be correct, it would gel with what the Mid-term Election seasonality suggests is the case, and a scenario I outlined in my 2022 Technical Outlook in January: To Summarize- Stocks are thought to trend lower in the first half of the year, then bottom and turn back higher from lows made in June/July. My base case target was SPX-3815.
Ethereum Breaking Out !! Ethereum has begun to show some real evidence of outperformance in recent days, and Friday’s (3/18/22) breakout of its one-month downtrend is quite positive for its prospects of extending gains in the days/weeks ahead. Following ETHUSD’s greater than 50% decline from November 2021 peaks, prices have slowly but surely begun a consolidation process which began in late January. After its first breakout attempt into early February, ETH pulled back to higher lows which was encouraging. The latest uptick in relative strength this past week however has been a big positive technically, and we have witnessed both a relative breakout vs Bitcoin followed by an absolute breakout on its rally above 2850. Initial upside targets lie at 3045, which represents the most important near-term hurdle to overcome. However, the ability to climb above 3045 would represent a very constructive development for ETHUSD technically, leading initially to 3500 with stronger upside targeted resistance found at 3825-4100. Overall, ETHUSD’s near-term pattern looks promising to kick off a long-awaited bull rally and its uptick in relative strength makes ETH look bullish technically and an outperformer vs. Bitcoin.
