Happy Easter and/or Passover to all who are celebrating !!
Near-term trends in US Equities remain bullish, and it’s thought that rallies back to SPX-4175-4200 might be possible into early next week ahead of any major stalling out.
Large-Cap Technology has taken the lead to drive Thursday’s outperformance ahead of the long holiday weekend. While Friday’s Non-Farm Payrolls data seems like an important data point, the near-term trend looks likely to push back to marginal new weekly highs ahead of a possible mid-to-late April peak.
Bond yields have continued to drift lower and ^TNX -0.99% , TYX have both broken monthly support levels which had held in recent months. As I discussed last week, the positioning never truly caught up with the rapid rally in Treasuries immediately following the Banking crisis. Despite a 70 bp drop in TNX over the last few months, CFTC data still showed non-Commercial Treasuries positioning as being negative as of most recent data from 3/23/23. Cycle composites show lower yields into May before an abrupt about-face back higher.
Short-term gauges of sentiment have begun to turn less pessimistic following three weeks of Equity rally for US stocks, as might be expected. It’s anticipated that Equity index rallies into next week’s CPI/PPI data might set the stage for some resistance to this stock rally at a time when many have been suddenly convinced that US equities can weather any bad news which is thrown at this market.
The key takeaway from this past week centers on the following points:
- Defensive positioning is increasing following weaker economic data
- Minor evidence of cyclicals stalling out
- Commodity rally reasserting itself given recent gains in Metals and Oil
- Breakdown in Treasury yields across the curve as yield curve has steepened
- Sentiment is growing slowly but surely a bit more optimistic in the last week
Hourly S&P Futures charts illustrate this recent technical pattern from 3/24/23 lows nearly two weeks ago. This pattern seems to suggest another rally back above 4173 can happen which could allow for a rally to 4191 before stalling out, potentially next week.
As seen below, the 3/28-4/4 rally managed to exactly double (in points gained) the initial move off the 3/24 lows into 3/27. (Many times index movement can approximate prior price waves in both price points gained and time of a prior move, or a certain multiple of a prior move.)
Utilizing this same technique, upside price targets on a “wave 5” advance would possibly advance to technical targets at SPX 4191. This would be important if hit next week, and might allow for some stalling out and a possible reversal.
Bottom line, near-term trends remain positive, and I expect a test of 4/4 peaks into next week’s CPI/PPI reports.
SPX weekly chart offers something for Bulls and bears alike
Weekly SPX chart shows a few reasons for optimism given the positive momentum following the rally off last October’s bottom. Momentum indicators like MACD remain trending higher and positively sloped and not overbought.
However, there remain some reasons for possible caution over the next two months if the downturn in cyclicals turns more serious, and Technology stalls out from an overbought state. As shown below, the rally remains well off the peaks from early 2022 and price action has proven largely “choppy” in recent months on an intermediate-term basis, despite the rally off the October lows and recent rally from mid-March.
SPX has recovered 50% of the prior decline from 2022, yet remains technically weaker than European indices which have rallied to within striking distance of all-time highs.
Key areas for the bulls which would help optimism to grow about the rally turning more broad-based lies at 4200. It’s thought that consecutive weekly closes over 4200 likely drive prices up to last August’s peaks at 4325 for SPX. Conversely, any decline back under 3800 would be reason for concern on an intermediate-term basis.
Regardless of any Spring consolidation which might take place in the month of May (which we’ll discuss in due time) technical trends and my outlook for 2023 remain bullish. I suspect that a pullback, if/when it arrives, should prove short-lived and minor in scope.
Treasury yields continue to pull back sharply and that should continue in April
As discussed in recent weeks, the Treasury rally (or as seen below, Treasury yield decline) continues to show evidence that even further pullbacks in yield are possible and likely in the weeks to come.
2-year yields have declined more than 100 basis points (bps) in just the last month, while both 10, and 30-year Treasury yields have fallen more than 60 bps since 3/2/23.
While the yield curve has steepened out a bit on 10’s-2’s curve, it’s proven to be not nearly as severe on the 10’s-3-month curve. As history has shown, recessions typically happen with a severe steepening of the curve after having flattened to negative territory. Thus far, the steepening hasn’t been relatively meaningful.
US 30-year Treasury yields, as shown on daily charts below, have closed at the lowest levels since last December (2022). This breakdown creates a fairly bearish technical structure in the short run and bodes well for additional weakness down to 3.42% with an outside possibility of 3.00% into May before a rebound gets underway.
China looks more appealing following recent pullback
China looks technically attractive following its decline from January 2023 which resulted in this giving back 50% of its rally from last October 2022 lows.
It’s been widely reported that China’s reopening continues to gather pace, and signs of increased loan demand and credit is extending to the household sector. Following a greater than 30% rally off the lows that made the Ishares China Large-Cap ETF (FXI -0.53% ) overbought, recent weakness and this past week’s stabilization creates an attractive risk/reward.
While the US Dollar likely could rally in May/June timeframe after an initial large decline in DXY, it still looks likely that further near-term weakness occurs in DXY in the weeks ahead.
Thus, Emerging markets and particularly, China, very well could benefit from a declining US Dollar.
Evidence of stabilization on daily FXI -0.53% charts looks to be trying to create a technical bottom at symmetrical levels to the lows that happened last Spring. Rallies look likely in April, and might help FXI push back to test early year highs.
On an intermediate-term basis, the act of surpassing $33.38 would provide the technical confirmation for a possible move back higher to the low $40’s. At present, while premature, FXI’s stabilization makes this appear like a much better risk/reward than was the case a few months ago.
Bottom line, while a giant breakout of January highs will take time, but movement above $33.38 would represent a confirmed breakout of a reverse Head and Shoulders pattern (For now, premature.)
This recent stabilization has been sufficient enough to merit giving FXI serous consideration, along with the Kraneshares CSI China Internet ETF, KWEB -1.21% (which is largely Technology based). Daily charts of FXI -0.53% show this recent progress below.
I find stock charts of BABA -1.76% , BIDU -0.54% , TCEHY particularly positive at current levels and feel that these all should begin turning back higher to test early year peaks in the weeks ahead.
