The stalling out in S&P looks to be starting as of Friday, with a minor 1% pullback in S&P while NASDAQ is lower by more than 2%. Volume is very heavy in declining issues, but SPX has not yet violated prior days’ lows nor the uptrend from this week near 3927. Overall, as shown below, this week’s gains have been constructive after having broken out above this giant consolidation range from late June (shown by green arrow). Technology, Discretionary and Financials have led this rally, and Treasuries have also followed suit and yields have pulled back to near important support. Heading into this month’s FOMC meeting, I’m expecting that Growth likely could backtrack over the next couple weeks coinciding with Treasury yields starting to stabilize and turn higher. While it’s difficult to call for a move back to lows, I do feel it’s right technically to expect some backing and filling heading into FOMC, and SPX could weaken down to 3750. Only if 7/14 lows of 3721 are broken would this advance be in jeopardy, and that’s not expected at this time. Specifically, 3927, and 3721 are key levels on the downside, while 4012, then 4035-50 is important on any further gains next Monday.
Gains have largely been led by Technology, Financials and Discretionary
Looking at what led this rally over the past week, we see fairly broad performance out of quite a few important sectors. Industries like Technology, Materials, Industrials, Communication Services and Financials were all higher by more than 6%.
Some have argued that the lowest quality names have made the largest moves (Retailers, and Casinos) and this certainly has been true to some extent. However, I feel it’s always important if groups like Technology are leading the way, given this group’s 28% weighting within SPX. Meanwhile, Defensive groups like Utilities have lagged and underperformed throughout most of July.
Overall, this outperformance might show some mean reversion between now and mid-August, with bounces in the laggard groups and weakness in some of the leaders (I showed yesterday how SOX might stall near key trendlines), but I feel strongly that any near-term weakness in Technology particularly into early to mid-August should constitute a buying opportunity.
Treasury yields look to have pulled back to key support into Friday
Technically speaking, I’m expecting that another Treasury selloff could be upon us as we head into one of the most important FOMC meetings this year. Strength from mid-June in the Treasury market nearly exactly coincided with a similar move in Equities, and now both look to be near important areas which might cause trend reversals.
As shown in yield terms below, ^TNX 1.14% peaked within one day of Equities bottoming. This might be grounds to expect the opposite in the short run as yields attempt to bounce into/following next week’s FOMC meeting.
Structurally speaking, some might argue that this daily chart resembles a Head and Shoulders pattern. As we know from past study, these patterns are not all that reliable until the “so-called” Neckline is broken. Most tend to be consolidation patterns only which can lead back higher.
Technically speaking, Elliott wave patterns along with technical structure both argue for recent weakness in yields to hold and turn back higher. This very well could coincide with an Equity pullback in the short run if the current correlation between Treasuries and Equities remains in place.
Overall, I’m expecting that 2.70% should hold on this recent pullback in ^TNX 1.14% , giving way to a rally back to recent highs. Movement to 3.50-3.70% would constitute an attractive opportunity to scale back into Treasuries, but at present, this area looks like important support for yields. TBT 1.54% and/or TMV 2.22% look like possible ways to play a move higher in yields.
QQQ vs SPY has rallied up to initial resistance after successfully bottoming
Charts from Symbolik show the relationship between QQQ 1.15% and SPY 0.91% which successfully produced TD Combo weekly buy signals right near the recent bottom in June. This reversal back higher directly coincided with Technology outperformance as QQQ 1.15% outperformed SPY 0.91% .
This past week has now shown this ratio finding strong resistance near the existing downtrend. I expect this holds in the short run and produces a minor downside reversal into early August. Technology in this case, would likely underperform over the next couple weeks, while Utilities and Staples outperform. Energy also looks likely to rally next week, although this should prove short-lived, and WTI Crude likely finds strong resistance near 107-110 before turning down for a decline to the upper $80’s.
For my 7/19/2022 CNBC Closing Bell Overtime appearance see here.
