Treasuries look to be bottoming out
Good Evening,
Key Takeaways
- Thursday’s decline might be getting a bit stretched, but even short-term lows likely won’t materialize until early next week & should prove brief – Downtrend very much intact.
- Treasury yields showing evidence of rolling over, i.e. Treasuries bottoming out this week.
- Equity Put/call getting close to levels of importance, but still no capitulation.
SPX is now set to record one of the weakest weeks since January with AAPL and MSFT’s recent support violation causing a huge headwind for indices to stabilize just yet. RSI has now officially gotten to levels that many would argue are oversold on weekly charts. However, as we all know, buying/selling on the first sign of Oversold/overbought is rarely the correct thing to do. Overall, prices are nearing targets at 3815 discussed in January as being important. However, time is not quite there to indicate a serious low is at hand. DeMark indicators on weekly basis are not yet showing exhaustion, and my cycle composites suggest June might be more important than May for any kind of important Market low. Thus, my thinking is that while a short-term low could materialize starting next week, it shouldn’t prove too serious, and ultimately lead to a final washout into June. Support lies at 3815, while strong resistance lies overhead at 4100.
Treasuries look to be bottoming out-Some technical thoughts
Treasury yields across the curve have shown some evidence of peaking out in recent days. I expect pullbacks in TNX down to 2.38% or even 2.14% before stabilizing.
This move looks to be temporarily breaking the positive correlation between Treasuries and Equities that’s been in place for the last few months. I view this as a last-ditch flight to safety given the more severe decline in the larger Technology names, and it looks important.
Thus far there’s no evidence of yields pulling back affecting growth positively. This is largely due to AAPL and MSFT just having pulled back to new monthly lows. However, a continued decline in yields likely could have a positive effect, and that’s something to watch for.
Cycles suggest yields likely weaken into June. Thus, given Equities also have downward bias into June, this might allow Treasuries to rally (Yields decline) at a time when equities make a final flush into June before bottoming.
Daily TNX charts below highlight this break of the two-month uptrend for US 10-Year Treasury yields. I expect that yields likely reach at least the first 38.2% Fibonacci level of this decline and likely a 50% retracement before bottoming.
Treasury yield cycles show a downward bias for a pullback over the next month
The cycle composite of the US 10-Year Treasury ETF (TNX) is shown below, which is in the process of peaking out following a very steep ascent since early 2022. This directly ties in with the daily TNX cycle which has had a fairly accurate record of marking peaks and troughs in yields over the last few years.
Pullbacks in Treasury yields look likely into the month of June before reasserting their upward bias for possible further backing up into September. As discussed previously, I expect yields to trend lower over the next month before moving back up.
To take advantage of such a pullback in yields, one could “go long” Treasury Futures, or consider long investments in TLT, which looks attractive to buy/own between now and mid-June.
Growth now looks to be violating intermediate-term trends vs Value going back since 2016. This is an interesting development, as we’ve seen the deterioration in the Small and Mid-cap Growth ratios vs Value, but this is now happening on the Large-Cap side.
The weekly chart below highlights the Ishares S&P Growth ETF (IVW1.40% ) vs the Ishares S&P Value ETF (IVE0.63% ), which has just violated uptrends since 2016 this week.
Given that AAPL and MSFT have both broken down to new multi-month lows, this makes perfect sense that this ratio likely is showing severe deterioration and also might be weakening. Overall, it’s thought that Large-cap Growth is finally joining in some of the weakness being seen on the Small and Mid-cap Side.
While a sustained drop in Treasury yields and/or some evidence of weakness in the Energy sector might result in Growth starting to stabilize a bit vs Value, this chart below shows the opposite. Thus, the next few weeks might continue to show bigger underperformance in Technology despite Value starting to wither a bit with Financials dropping off sharply. I’ll update thoughts on Growth/Value going forward when appropriate, but at present, it still seems like Value should be overweighted.
