The near-term two-day pullback in both Stock indices and Treasuries hasn’t done much damage, and trends in both remain higher over the last few weeks.
Pullbacks are happening in most of the sectors that have experienced the greatest amount of gains this year, like Communication Services, REITS, and Technology.
Sentiment had shown a few signs of getting short-term ebullient, as part of a longer-term pattern of excessively bearish sentiment. So while minor pullbacks were possible from last week’s highs, it’s doubtful markets show too much further weakness.
Leading sectors” like sub-industry groups of Semiconductors, Transportation, and Homebuilders, have all outperformed sharply, and all of these remain attractive to buy dips.
Until/unless SPX were to break support near 4000, it’s right to buy dips, expecting a push back towards 4200 and above into February expiration.
It remains painfully clear that investor expectations on earnings effects on US stock indices as well as Fed policy expectations very well might need to be reset, as very little of the negativity has successfully brought stock indices lower as many strategists have been discussing. Furthermore, we hear non-stop on traditional media outlets that “markets are not getting the Fed’s message” At what point will this negativity turn towards embracing this rally?
Given no real weakness while bullish seasonality is ongoing for this time of the year during pre-election years, (Q1 represents the best quarter of any of the 16 quarters that make up the Presidential cycle) it should remain correct to buy dips given no evidence of trend damage.
Daily Bloomberg charts of SPX having risen to the highest levels in six months show the degree of constructive technical progress in recent weeks. While a minor pullback is underway, prices barely were able to undercut 4100, much less 4000. I expect that an upcoming rally back to 4200 and above should be getting underway this week.
Mid-caps remain preferred over Large, and Small-cap
Ratio charts of Mid-caps to SPY have recently broken out to the highest levels in more than two-years time, exceeding a five-year downtrend in the process.
Mid-caps have proven to be far stronger than Small-caps,and have been within an ongoing uptrend. Yet, vs. the Large-Caps, this breakout looks to have just recently occurred over the last few weeks.
This is encouraging towards showing that both Small and Mid-caps have been working quite well recently. Even with the bounce back in Large-Cap Technology, it’s been Mid-caps that have “stolen the thunder”.
Daily ratio charts below of the MDY , the SPDR Midcap 400 Trust ETF, vs. S&P 500 ETF, SPY, this downtrend extends back since 2017 and has just been exceeded, breaking a downtrend exceeding 5.5 years.
Until proven otherwise, it’s thought that Mid-caps should show better strength this year than either Large, or Small caps.
Homebuilders have hit highest levels in more than a year
Technically Homebuilders remain attractive after the SPDR Series Trust Homebuilders ETF (XHB) rose to the highest levels in more than one year.
While some minor stalling began late last week coinciding with Treasury yields bouncing off last week’s lows, nearly a 20 bp. Move in ^TNX in two days’ time, this hasn’t been sufficient in turning trends for TNX higher.
Homebuilder etf XHB has certainly become near-term overbought as of the last few weeks. However, the minor pullback which began last week looks to be alleviating overbought conditions, and should provide appealing buying opportunities for many of the Homebuilding stocks this week.
Ideal support for XHB lies between $68-$69 on further weakness, and I expect this holds and allows XHB to push back to new monthly highs, with the next resistance found near $78-$80 on the upside. Stocks like LEN, TOL, PHM are all preferred within the space, technically.
Dollar strength should prove short-lived, and turn back lower
The US Dollar index has now enjoyed one of the stronger counter-trend bounces since late 2022 which makes many wonder if DXY is truly able to turn back higher meaningfully.
After all, the ECB’s persistence in tightening further and longer than the FOMC in the US should continue to result in the US Dollar falling, not rallying vs. most of its peers.
In the short run, the upside looks short-lived, and rallies should prove temporary before turning back down to new lows into March.
Daily charts show the positive momentum divergence in MACD which fueled the recent counter-trend bounce, and DXY has reached the levels since mid-January.
However, daily Ichimoku cloud resistance looks very strong, directly above. This intersects near $104.60 and should translate into a very difficult area to climb above.
US Treasury yields have climbed in tandem with the Dollar and looks to have a similar level of resistance which should mark a peak in both this week before both turn back lower.
As discussed, it’s always worthwhile to watch Treasury yields carefully, given the level of negative correlation between yields and US Stocks. The selloff in both over the last couple of days has occurred in unison; however, uptrends in both Stock indices and Treasuries remain intact, making further losses in both doubtful at this time.
Check out my 2/6/2023 interview on CNBC HERE.