Key Takeaways
- Stock indices accelerated lower after breaking support- Holding May lows is key
- US Dollar & 10-Year Treasury yield nearing resistance after sharp two-week rallies
- Equal-weighted Technology ETF is positive over last rolling 1-month
Thursday’s late day breakdown accelerated under important SPX support Friday morning at 3982 that was thought to be key to hold heading into Friday. Technically speaking, there’s not much that lies between current levels and May lows, and this is thought to be important to hold heading into next week’s FOMC meeting. As discussed yesterday, volume has been relatively lighter on recent weakness, and despite stocks being adversely affected to real yields and the Dollar pushing higher, it’s interesting that Equal-weighted Technology has been positive over the last month (which has been disguised by weakness in large-cap “FAANG” names). Overall, I don’t see Friday’s weakness as necessitating a breakdown to new lows. Into next week I feel that prices likely can try to make a stand at/or slightly above May lows, but much will depend on the Dollar and yields both stalling out (as these both have coincided with Equity weakness). At present, no need to “be the hero” and aggressively buy until market indices start to stabilize a bit. However, keeping a close eye on May lows will be a key technical area near-term and it’s thought that the ability to hold May lows on this secondary drawdown will be important.
Reasons for hope on Equities in June, and a few ongoing concerns
- Technology has been positive over the last month when stripping out “FAANG” stocks. See below that Equal-weighted Technology has been positive, while XLK is down. Thus, large-cap weakness has disguised the overall positive move in Technology.
- Tech stocks like IBM, CRM, NOW, FTNT, DXC are all higher by more than 5% in the last month. This is a positive and not being discussed.
- Treasury yields and the US Dollar’s rise has specifically coincided with weakness in US Equities. I do not see this continuing into July, but both are close to resistance and should reverse back lower, likely post FOMC.
- Market cycles suggest Equities bottom in June, not dissimilar from years like 1962, which showed early year weakness and then rebounded in 2H.
- Small-caps have improved in the last month and along with growth rallying vs Value, this is thought to be an important part of a market bottoming process.
- Sentiment remains quite negative and has gotten worse this past week, though no capitulation. Increasingly, this might not be needed if everyone is searching for it.
- Breadth improved sharply into late May, with percentage of stocks trading above their 20-day moving average having moved up to 86% as June got underway (this is now 35%).
- Momentum improved short-term on the bounce, and now no longer oversold; Low volume declines into FOMC next week might hold May lows given negative sentiment.
Negatives:
- Weekly momentum still negative and fewer than 50% of SPX issues above their 50-day moving average.
- Bounce seemed like quite a bit of short-covering into late May, and we’ll need to see buyers emerge and volume and participation to increase on rallies.
- No real evidence of sentiment capitulation back in late May; Does this need to happen for a legitimate low? I am not certain in the short run.
- FAANG stocks like AMZN, GOOGL, NFLX, META are thought to need to rally to provide some real strength to this rally. At present, these have weakened in the last month and are “treading water” near monthly lows.
Overall, I feel markets are in a bottoming process. While this past week’s downturn gives some investors concern that markets are “going straight down”, there has been some constructive movement in many sectors (Technology in particular) that is helpful towards thinking markets are putting in a bottom. As discussed, the “two-steps forward, one-step back” process could very well be with us for another month as market bottoms typically take multiple retests and time to stabilize. But the risk/reward for being short given such negative sentiment is poor in my view, and it’s right to start looking for stocks with good fundamentals with technical pictures that are starting to improve.
Below we see that when ranked on a 1-month basis, Technology has been positive +0.38% while XLK has been lower by -3.74%. Thus, stripping out the large-cap behemoths is helpful towards understanding the “stealth” stabilization and strength in this group in the last month.
TLT has arrived at attractive levels to start buying
As the increase in Treasury yields has neared 2018 peaks along with peaks from last month, the Ishares 20+ Year Treasury Bond ETF TLT 0.07% has now pulled back to an attractive area of support to buy.
Weekly TLT charts show prices down near prior lows, and evidence of DeMark exhaustion is close to appearing on charts, and in my view, should be in place by next week to buy dips.
Overall, TLT bottomed initially last month, but has now retested and provided investors with an attractive area to buy dips. I like buying/owning TLT here thinking that 112 should be meaningful floor to pullbacks and should stabilize and turn back higher.
10yr-2yr curve starting to flatten dramatically again this week, yet 10yr-3-mth curve still at 1.70%, and meaningfully positive
The 2’s/10’s curve has moved back down to within striking distance of 0 after a parabolic move higher in the 2-year yield these past few days.
While many eye the 10yr Yield-2 Yr. Yield as being important as a recession predictor, the 10-year-3-month yield might be a more important gauge to watch.
As this weekly chart going back 40 + years shows, prior times when the 10-Year-3 month yield got down to 0 and below definitely coincided with recessionary periods, such as 1989-90, then 2000 and then 2007. Finally, this did turn negative also back in early 2020.
Recently, this has been spiking and nowhere near the 0 line and trading 1.70%. Thus, it’s thought to be one more piece of the puzzle which, at present, is in better shape, and not as bearish as the 2’s/10’s curve might imply on Friday’s flattening.
