Risk assets should consolidate as Bond yields/USD Spike
- SPX about-face has taken prices to right above key intermediate-term support.
- Growth has held up over May lows vs. Value and has shown better relative strength.
The huge NFP (Jobs) print on Friday could very well be the catalyst for a short-term pullback in Stocks. This led to a rapid backing up in rates and also a ratcheting up in the US Dollar. Over the next two weeks, I anticipate a backing up in Yields and US Dollar back to monthly highs, and this likely coincides with SPX selling off to down near 3900 or even 3850. Reasons for a decline have to do with meaningful resistance given trends in SPX and QQQ0.82% along with counter-trend exhaustion per DeMark indicators. Additionally, cycles based on my Mass Pressure index point down into 8/15, which I feel coincides with a consolidation in stock indices after a stellar 14% lift in seven weeks. For those that utilize Fibonacci tools, it’s noteworthy that the SPX rally from 6/16 was 49 calendar days, representing a perfect Fibonacci 61.8% in TIME of our 3/29-6/16 decline of 79 days. Overall, a pullback looks to be upon us, but I do not suspect it should prove damaging enough to retest lows, a theme that increasingly seems to be consensus.
Technical Reasons for near-term Concern
- AAPL0.50% , MSFT1.63% , AMZN0.96% , GOOGL10.43% along with QQQ0.82% , SPX all up near trendline resistance.
- Short-term momentum nearing overbought levels after a 14% SPX gain in seven weeks’ time, nearly 2% gains on average a week.
- US 10-yr Treasury yields look to be turning back higher and have recouped the prior Head and Shoulders pattern that had been broken. Yields and stocks have shown consistent negative correlation, so I think this jump in yields could prove negative for Stocks.
- Counter-trend exhaustion via DeMark TD Sequential and TD Combo indicators.
- Cycle composites point lower starting 8/5 into 8/15 before turning back up.
Technical reasons for intermediate-term Optimism
- Technology has been one of the strongest groups performance wise off the June lows, and Equal-weighted Technology has gained over 14.75% in the rolling 1-month period. This helps to add conviction to this bounce as being legitimate.
- NYSE Advance/Decline has broken out of a 2022 downtrend, suggesting our June lows were far more important than February, March or May.
- SPX percentage of stocks > 50-day moving average has jumped to 75%, new highs for 2022.
- Bearish sentiment continues, despite a 14% SPX rally in seven weeks. There remain more bears than bulls on the latest AAII survey.
- Cycles point higher into September of this year and also into year-end.
- Treasury yields likely turn back lower from mid-August into end of year, which could provide a boost to Technology.
Overall, while a near-term consolidation/pullback looks increasingly likely, I’m expecting that the degree of breadth acceleration in July coupled with Technology’s strength off the lows should provide a solid backdrop to buy dips amidst an ongoing sea of pessimism. SPX dips likely find strong footing near 3900 or a max near 3850. Only if 3720 is broken would the bearish case be given more leeway.
Rates backing up is a key catalyst for an index decline given prior positive correlation
Friday’s NFP number directly coincided with Treasury yields jumping across the board, across most maturities.
A move back higher in yields likely would be a negative for US equities given ongoing negative correlation with yields and Equities.
Recall that 1/3/22 SPX peak/start of decline coincided with Yield breakout and then Yields peaked right in mid-June as Equities bottomed. A move back up above 2.85% should lead to 3.1% and then 3.50-3.6%. Once this move higher in yields plays out into mid-to-late August, a decline back lower in yields should happen between late August and end of year.
A larger decline in yields likely proves positive for US Technology. At present, I expect the opposite over the next two weeks, and anticipate a bounce in Treasury yields. The chart of US 10-Year Treasury yields is shown below, with the arrow emphasizing the early morning jump in yields directly following the “hot” Jobs print.
Two-year yields are also breaking out and might be something to pay attention to.
This surge in yields has caused 10-yr-2yr spread to reach the lowest levels in 22 years. This Triangle being exceeded likely cause 2-year yields to trend up above 3.50% in the short run.
Performance data shows Technology outperforming on 1 week, and 1 month basis
Looking over performance for this past week, Equal-weighted Technology has outperformed all other S&P SPDR ETF’s with returns over 1.48%.
Discretionary and Industrials have also showed above-average performance
Most commodity-based stocks have weakened and Materials and Energy remain near-term underweights as the decline in WTI Crude oil is ongoing.
Friday’s gains in US Dollar likely will cause further weakness in commodities, and this might spread to Gold and Silver, making the Miners vulnerable to weakness in August.
Near-term, Defensive groups like Utilities and Staples might outperform into mid-August, but dips in Technology should be buyable given the uptick in momentum and improvement in technical structure for this group.
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