Yields to challenge monthly highs after strong Eco data
- SPX looks to have stalled out following better than expected economic data
- TNX breakout above 3.00% along with 1 month downtrend should carry TNX to 3.50%
- HUM remains one of the more attractive Managed Care stocks, and has broken out.
The stalling out in S&P post Non-Farm Payrolls data Friday shouldn’t have come as much surprise to those who are paying attention. In recent weeks, markets have seemingly punished good news, while rewarded bad, and this all seems to point to a stock market which stands ready to reward an FOMC which might have to “take its foot off the gas” on evidence that inflation has begun to back off in recent weeks. Technically, markets look to be at resistance, given signs of strong trendline resistance near late June highs, as well as important Ichimoku cloud resistance directly above. SPX should be unlikely to exceed 3946 (much less 4000) before backing down to test 3741-3744 which was tested on three consecutive days heading into this week. While July could prove choppy in the weeks ahead, it’s still more likely than not that a move down to new lows for 2022 happens into late July given evidence of rates turning back higher while the Dollar remains quite strong. While I remain a buyer on weakness, it’s hard for me to have faith in this near-term recovery given lack of participation and weak upward breadth thrust thus far. One should remain defensive over the next 2-3 weeks until this churning runs its course.
Rates should hold the key, and US 10-Year Treasury yields have broken out again
While there remain quite a few intermediate-term positives that seem to favor Equity rallies into September (cycles, sentiment, Elliott-wave structure) this doesn’t imply a rally has to be instant, nor occur in a straight line.
One of the detrimental factors seems to revolve around Treasuries selling off on strong economic data. It’s been evident that Treasuries rallying (Yields declining) as a few bits of economic data came in poor in late June might have coincided with equity markets bouncing. The correlation between SPX and Treasuries remains quite elevated.
Now rates have turned sharply higher following this past week’s stronger than expected ISM and JOLTS data, followed by Friday’s resilient Non-Farm Payrolls report. As has been discussed, I still believe that new highs are likely in TNX in July.
Moreover, given the lack of flows and liquidity along with nearly $95 billion in issuance next week, it stands to reason that yields might back up even further. Technically speaking, two developments are important to mention: First, TNX has successfully recouped 3.00%, the area near prior lows. That’s hugely important for Elliott-wave structure, and the rise back above 6/23/22 intra-day lows makes it very likely that a push back to new monthly highs can happen in July. Furthermore, downtrends from mid-June peaks were exceeded on Friday’s lift in Yields.
Overall, I remain negative on Treasuries for the month of July (Bullish on Yields). I expect TNX to rise to 3.50-3.60% without much trouble, and would use that move as a chance to buy Treasuries, and/or add to duration as a portfolio manager. Bottom line, this pullback in yields looks over for now, but could resume again following a push back to 3.50+.
FAANG has broken out vs Equal-weighted SPX in the last month
The recent stabilization in many of the largest Technology stocks has not gone unnoticed by some investors. The so-called “FAANG” basket, replicating the NY FANG index (Bloomberg) along with my own addition of Microsoft (MSFT-0.63% ), has recently broken out in relative terms vs the SPX in recent weeks.
The absolute charts don’t yet show a breakout is near, though it’s already happened on a relative basis, when comparing FAANG to the Equal-weighted SPX. What’s notable is that many of these stocks have held up above May lows, making them resilient at a time when markets weakened into June.
While this trade might require some patience if TNX pushes back to 3.50-60% in the short run, this part of Technology is attractive, and I like owning and buying all dips given the chance into late July. Overall, I expect a market low this month, and feel that Growth likely leads the way higher into September 2022 as inflation remains waning while economic data come in stronger than expected. AAPL, MSFT, GOOGL are stronger candidates to buy technically than META, or NFLX. However, all of these should be considered good dip buying opportunities on weakness into late July.
Humana (HUM-3.66% ) -One of the best breakouts within Healthcare
As a follow-up discussion to my Managed care discussion on Healthcare yesterday, I wanted to take the opportunity to post HUM’s chart, which I feel is one of the best risk/rewards within the space at the present.
As can be seen, there’s been a big breakout this week of levels that have held as resistance for nearly two years. Multiple retests of this $470-475 resistance level proved quite important over the last 20 months but have given way to a move back above $475 this week. Volume has been expanding on gains in recent days, and I’m inclined to view HUM as quite attractive as a stock to own despite the overall market environment being difficult. Near-term upside targets lie near 495, while above this level would help begin a lengthier advance to intermediate-term levels just below $600.
For 7/7/2022 CNBC Closing Bell Overtime appearance see here.
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