Heading into the end of the month and quarter, we’re reminded that this has been the worst first six months of the year for US Equities since 1970, over 50 years ago. Only five other occasions saw declines of greater than 15% over the first six months, and all five turned higher into the back half of the year, with a median gain of +15%+. However, the year that might show most similarity for investors is 1962, 60-years ago, appropriately nicknamed “The Kennedy Slide” when Equities fell 22.5% during the first six months of the year. Overall, in the short-run, Equities don’t seem to be getting too much traction on bounce attempts ahead of the July 4th holiday. While Friday should largely prove quiet now that June has run its course ahead of a long holiday weekend, it’s expected that Equities should follow-through lower to test and break June lows in the weeks to come, which might translate into a larger intermediate-term low sometime in July between 3505-3600. As discussed Wednesday, I am expecting that 3636 is broken before 3946 is exceeded. Thus, minor bounces pre-July 4th likely remain sellable.
End of month performance data shows Energy, Discretionary, Materials weakening the most in June
Sector-wise, we’ve seen some mean reversion in June, as WTI Crude’s first monthly decline of the year has resulted in very sharp declines in Energy. Incredibly enough, while Energy ETF’s XLE 1.15% and RYE were down 18-20%, Energy remains higher by over 30% Year-to-Date (YTD). I feel strongly that WTI Crude, Natural Gas and Energy as a sector will show further weakness in July.
Staples, Utilities and Healthcare were all down -2 to -8%, relatively much better for the month of June than the broader market.
Conversely, laggard sectors like Consumer Discretionary along with Materials and Energy were lower by 11-20%. It’s thought that weakness in all three might continue in July before both Materials and Energy stabilizes and pushes higher.
Despite Technology having dropped over 9.25% in the month of June (per XLK 1.08% ) many of the key “FAANG” stocks like AAPL, MSFT, GOOGL, are all trading above May lows. Technology outperformance is thought to accelerate as Treasury yields rollover.
Overall, I like being long Healthcare, Technology along with Defensive sectors like Utilities, Staples and REITS in the month of July, while avoiding Energy, Materials, Discretionary, and Financials.
How long can Equities diverge from Treasuries?
This week has brought about an interesting divergence as Treasury yields have begun to break down, violating uptrend line support while Equities have weakened this past week.
Diverging from Equities has proven unusual from Treasuries, as both seemed to have moved in lockstep for most of 2022.
The question is, have yields peaked for the Summer? I had expected that yields might back up again into mid-to-late July, and I don’t feel that today’s break of June lows in yields should fall too much further before reversing course to push back to highs. Overall, one should look at 2.88% or 2.78% as being important for US Treasury Yields as support where one can sell Treasuries for a move back to 3.50-3.60%.
DeMark based exhaustion is present on weekly charts of TNX and TYX. However, this has not yet been confirmed and would require remaining under 3.15% on a weekly close for TNX by 7/8, or under 3.23% by 7/15. Meanwhile, similar weekly closes to confirm a peak for TYX lie at 3.19% by 7/8, or 3.29% by 7/15.
At present, larger trends remain bullish for rates to continue higher into mid to late July, so the key takeaway should be to bet against this recent pullback in Yields, expecting some stabilization and trend reversal in the next week.
Natural Gas now following suit to WTI Crude as both look to have made important reversals
While it was expected that Energy might stabilize into this week, the last couple days have proven that this bounce has run its course. This applies to WTI Crude along with Natural Gas, both which have turned down sharply in the last couple days.
Charts below of Natural Gas front month Futures contract shows a violent break under last Friday’s lows as prices fell over 14% on the session. This brings the 1-month percentage change to -36.15% and has made many wonder if a bottom is near, technically speaking.
Bottom line, the breakdown this week is a technical negative and no exhaustion signals are immediately apparent based on my read of DeMark indicators that would suggest a larger low is near. The area at $5.09 represents a 61.8% Fibonacci retracement area of the entire rally from March 2020 lows which is initial support. However, a break of that could very well happen into mid-to-late July which would take prices down to prior November 2021 highs near $4.35.
I expect that Energy weakness likely continues in July, and that Energy as a sector should be underweighted for the next 3-5 weeks as this pullback in Energy commodities continues. This mean reversion could bring about weakness in Crude, Gasoline and also Natural Gas. However, my long-term bullish view on Energy remains intact, and as such, this is just a tactical correction.
Natural Gas Cycles also seem to weaken deep into 2nd Half of this year when focusing on the top 3-5 weekly cycles that have been coincided with the majority of the best turns in Natural Gas over the last two decades.
I took some time to put together a Composite combining highly successful cycles such as the 141 week and 124-week cycles, which had the highest strength and Bartel scores over the last 20 years.
Interestingly enough, the end result seems to suggest that Natural gas might have peaked for the year. This weekly cycle projection runs lower into end of year before bottoming. Similar studies on daily cycles focus on 234 and 175 trading day cycles. These bottom in mid-September and bounce. However in this case also late year weakness looks likely.
Bottom line, I feel that Natural Gas and Crude both head lower into July. However, weekly Natural Gas cycles seem to indicate a greater potential for intermediate-term weakness in the back half of this year.
