Treasury yields likely to bounce further after hitting support

Given the degree of sideways trading in Equities over the last week, the real focus should be on what’s happening in Foreign Exchange (FX) as well as Treasuries.  US 10-Yr Yields look to have found good initial support near 2.70%, a meaningful support level coinciding with lows over the last few months.  Following a stronger than expected JOLTS & ISM reports, rates turned back higher Wednesday morning, and I expect this is a rebound that likely continues in the weeks to come.   Many have “thrown in the towel” on the idea of further selloffs in Treasuries given recessionary fears resurfacing.  While I agree that yields likely do move lower between July and September, I don’t share the vision that rates have definitely peaked for the year.  Current technicals suggest that a retest if not brief move above June highs very well might happen ahead of a larger pullback.  3.00% is a very important level for TNX on a bounce.  Getting over this would tilt the odds that 3.483% will be tested and briefly exceeded into late July.

Commodity breakdown should extend given intermediate-term trend break  

While some rightly acknowledge that the economy could be undergoing more of a slowdown than entering an imminent recession right away given the less negative economic data Wednesday, the downtrend in commodities seems to be picking up speed.

Cotton, Wheat, Iron Ore, Natural Gas have all fallen more than 20% Year-to-Date (YTD). The Bloomberg Agriculture Subindex as well as the Bloomberg Industrials Metals Subindex have already violated two-year uptrends and the Bloomberg Commodity Spot index has fallen enough to meet the common definition of a bear market, having fallen 20% as well.

Even when looking on an Equal-weighted basis, this recent selling shows it’s far more than just an Energy story. The S&P GSCI Equal-weight Commodity Sector index (EWCI) has broken uptrends going back since March 2020 lows (I frequently prefer utilizing equal-weighted gauges for commodities to avoid Energy from weighing too heavily on analysis).

Near-term, EWCI likely falls to give back 50% of the two-year rally.  This would line up with targets near 151 on this Equal-weighted Commodity gauge but should be an excellent buying opportunity for Commodities.  The severity of the decline likely is serving as a relief to the FOMC, but yet it’s tough to count out commodities in the back half of 2022, particularly given the ongoing supply issues affecting global Energy.  Bottom line, precious and base metals along with grains and Energy commodities are likely buyable on further weakness into the July FOMC meeting at the end of July.  At present, more weakness is likely.

US Dollar index likely overshoots, but getting “late in the game”

Technically speaking, this breakout to near 20-year highs in the DXY looks quite difficult to fade and should extend further into at least the end of July. Given ongoing political unrest in the UK, interest rate differentials, and the possibility of gas being shut off in Europe, it’s still quite difficult to consider a scenario where the DXY starts to weaken.  

The Euro is now nearing parity with the US Dollar, and Pound Sterling (Cable) has also broken down sharply in recent days.  The degree of positive correlation with Euro and Sterling remains quite high.  The question remains, however, as to how much is already baked into this picture, vs. what’s not yet consensus.

Technically speaking, the act of breaking two former peaks of a consolidation pattern in DXY which has been ongoing since 2015 is normally quite bullish, structurally speaking.  As has been shown in reports in recent weeks, the USDJPY patterns remain quite positive, and one can’t rule out a possible test of 1998 peaks, more than 24 years ago.   Positioning also doesn’t seem too negative, when eyeing CFTC Euro Net Non-Commercial Futures at -10596, well above levels seen in 2020 as well as 2015.

However, momentum, cycles, and Elliott-wave structure are starting to suggest the DXY rally is very much “late in the game”.  Momentum indicators such as RSI have begun to show overbought readings on a weekly and monthly basis (Monthly RSI is now at 74.5, the most overbought since 2015).  Moreover, this wave structure from late May shows this to be a likely 5^th wave as part of a 5-wave advance from 2021.  Bottom line, further strength looks likely in the weeks ahead, but it’s worth keeping a close eye on trends.

Biotech has begun to show credible evidence of bottoming  

One interesting development lately is the extent to which Biotechnology stocks have begun to spring back to life, despite Equity market indices still trending sharply lower.  This chart below of the NASDAQ Biotechnology ETF (IBB0.06% ) which has just broken out of a lengthy downtrend from last November highs.  This is very constructive development for IBB and has led to a bullish crossover in momentum gauges like MACD on a weekly basis following the recent positive divergence on the decline into June lows.

Importantly, this advance might take time, and this breakout doesn’t immediately support the idea of an imminent rally back to recoup 50% of the advance.  Given that markets still look to pull back to new lows into July, my thinking is that selloffs in IBB over the next few weeks will be buyable.  Overall, momentum likely has bottomed on this 17-month decline.  Prices very well could have bottomed as well, and I feel that there is a 75% chance that June lows will hold on any further decline in stock indices in the weeks ahead.

Overall, one should look at buying IBB near 72.50 initially, near the 50% retracement of the recent bounce.  Under $70 would allow for a move to the mid-$60’s. However, I view Biotech as being a very attractive area to start positioning long into late July for a big bounce into September.  Favorite stocks in this group are AMGN, VRTX, REGN, BIIB and MRNA.

S&P Pharmaceutical and Biotech index (S5PHRM) also looks to be breaking out

This S&P GICS Level 2 index has held up remarkably well over the last year, and as charts below show, S5PHRM has barely lost any ground, despite SPX having fallen over 20% YTD.

This weekly chart shows the lengthy uptrend from 2020 having morphed into a sideways pattern only, as opposed to the declines which have been present in many other sub-sectors.

This level 2 group contains a mix of Pharmaceutical stocks, Life Sciences stocks as well as many Biotechs.  This breakout of the minor downtrend in S5PHRM echoes what’s being seen in IBB, and XBI, bolstering the case that further gains could be likely in the coming weeks/months.

Bottom line, Healthcare generally tends to work well in July.  As I’ve discussed in prior reports, the average gain for the S&P Healthcare SPDR Select ETF (XLV0.38% ) is +3.23% over the last 10 years on average in the month of July.  The only “down” July in the last decade occurred in 2019.  This falls directly in line with my 2022 Outlook thoughts of Healthcare outperforming this year, and I feel that further relative strength is likely this month, despite the above-average likelihood of equities weakening further.  This area should be one to overweight.