Key Takeaways
- Stock indices likely to test 5/12 lows, but trading lows are near and 3815-3858 impt
- Technology has begun to outperform over the last week, and thought to be positive
- Bitcoin now holding steady near last Summer’s lows despite Equity index drop
Trends remain bearish but should be nearing an attractive near-term low by early next week and might materialize into late Friday. Most who are trend following know that bounces within downtrends are certainly common, and until any strength is truly proven, it’s difficult to make too much of any rebound. Reasons for sudden near-term optimism have to do with momentum starting to diverge positively along with extreme readings in TRIN, which skyrocketed to over 3 on Wednesday. Additionally, Technology has actually moved higher this past week, which might have gone unnoticed by many who are simply eyeing XLK for Tech with its heavy AAPL and MSFT weightings, which have both been negative influences on Big-cap Technology.
Yet further price damage looks necessary into Friday, and I’m expecting a full retest of last week’s 3858 low. This might be undercut briefly, but I’m not expecting a pullback under 3800 just yet and prices likely stabilize into next week and attempt to bounce. Until this ongoing downtrend is broken, it will be difficult to make too much of an SPX rebound. As has been mentioned recently, it will be tough to trust rallies with Transports having just broken down, while weekly DeMark counts are very premature. Sentiment does seem to be reaching a tipping point however, and breadth shows a sudden overbalance of selling. While no dislocation is present and RSI levels are not really oversold on any metric, further pullbacks to 3815-3858 likely do hold in the short run.
Technology has started to rally… Are we paying attention?
One of the more interesting areas of recent sector rotation has to do with the extent that Technology is starting to gain traction as Treasury yields roll over.
While many suspected that Tech might start to gain ground given the extent of the weakness in a mean reversion type trade, this has literally just begun to happen this past week, albeit in stealth mode given the influence of AAPL and MSFT being negative influences on the XLK.
As this ETF performance table shows directly below (which includes performance of the S&P SPDR Sector ETF’s along with the Equal-weighted ETF’s), Equal-weighted Tech has risen nearly 2% in the last week, despite the S&P being down -1.31% in the rolling 5-day period through 5/19/22. XLK also has been lower by -0.54% during this same time.
Thus, Technology has bounced as Treasury yields have begun to weaken. While there isn’t convincing proof just yet that rates have peaked, this should happen into late May and the downturn in Treasury yields should directly coincide with Tech bouncing. Stay tuned.
Technology likely mean reverts higher in June as Energy, Transports, and Consumer sectors underperform.
Technology in Equal-weighted Terms (see below based on Invesco’s Equal-weighted Technology ETF- RYT ) has turned higher as Tech has outperformed the SPX over the rolling 5-day period. The start of a larger Tech rally might still be a few weeks away, and might depend on a more meaningful peak in rates, which for now, have churned near recent highs. Elliott counts argue for a possible temporary retest and move above last week’s Yield highs before the rollover begins in rates, but it looks close and should materialize in June.
Daily RYT charts remain broken, but as the bottom part of this chart shows, relative strength has begun to take hold for Technology. Many who are simply looking at XLK might not see this move developing just yet, but my feeling is that Tech is close to bottoming from oversold levels.
Given the deterioration in other groups like Transports, and Consumer Discretionary and Staples, not to mention evidence of WTI starting to peak out, it might take time before the stock market makes an intermediate-term bottom, but I expect this by mid-to-late June into July before a rally into September. For now, seeing Tech stabilize and turn higher is the first piece of the puzzle. Combining this with elevated Arms index (TRIN N/A% ) readings means an oversold bounce is not too far off. The next 2-3 days should provide entry points for aggressive dip buyers who might wish to try to time trading lows.
Bitcoin starting to stabilize and has diverged from Equities lately
Bitcoin has largely ignored the recent selling in Equities, which is an interesting development considering the degree of positive correlation lately with BTC to the NASDAQ. As daily charts show, prices remain at/near lows made last June at $28,600 and have successfully held this level over the last week. Moreover, the recent flush attempt back on 5/12 recovered, and BTC has traded above this level over the past week and not fallen to new monthly lows like many US indices. Overall, it’s premature to claim this correlation is completely broken, but it’s a welcome new development that will merit watching carefully in the weeks ahead. Bottom line, daily closes back over $31,411 will be necessary to think a short-term low is in place. One can’t rule out a final pullback to test $25,401, which I expect might be likely into late May if the weakness in risk assets persists. However, I view this ability to hold as an early promising sign that significant trading lows should be in place into late May/early June. Further weakness should constitute an excellent opportunity to buy dips and expect BTC follows its cyclical pattern, which carries higher from June into November.
