US Equity indices like SPX and NASDAQ are now nearing August lows, which is quite important technically speaking just as Treasury yields have broken out to new 15+ year highs. I expect that SPX and QQQ might not break August lows right away on a weekly close heading into the Yom Kippur holiday. However, it’s imperative that Treasury yields and US Dollar begin to roll over quickly, as further gains could still pressure stock indices a bit more into early October before a bottom .
Overall, US risk markets continue to operate in a “Bad News is Good News” mentality with regards to the US Economy. The FOMC’s removal of half the rate cuts which had been priced in for 2024 clearly seems to be sending a message that the economy remains stronger than many feel it should be given the 525 bps of rate hikes in less than two-years’ time.
Without delving into the economy, it’s simply important to take note that a rapidly rising US Dollar and Treasury yields have served to be a negative for US stocks since July.
While I believe that Equities and Treasuries should both be close to trying to bottom out in the near future (Rates close to peaking), it’s going to be necessary (in all likelihood) given the current correlation between Treasuries and Equities that Treasury Yields show some kind of peak before much can be expected out of any US stock market rally.
Given that Stock indices peaked out near the Rosh Hashanah holiday, it’s always important to be on the lookout for a possible Yom Kippur low to materialize. This could point to a Monday 9/25 bottom for US stocks just as stock indices are challenging August lows.
QQQ actually has held up far better than SPY in recent days, so despite SPY having shown a minor break of August lows along with S&P Futures, there remains positive divergence with QQQ holding up in much stronger fashion.
SPX rallies will need to exceed 4495 to have real proof of a bottom. Until that happens, bounces from 4400 could encounter resistance into end of September/early October and then weaken again for a final “flush”.
10-Year Treasury yields have joined 2-year yields at highest since 2007
Without getting too deep into economic thoughts, I’ll simply say that yields pressing to 15+ year highs is not a short-term positive for US Equities.
The act of TNX exceeding 4.00% back in July directly coincided with SPX starting to weaken, and the Jobless Claims number along with FOMC’s actions on Wednesday coincided with yet additional US Equity selling pressure.
FOMC actions directly coincided with yields pressing up to multi-year highs, and given the current correlation, makes it imperative that Yields show some kind of peaking process before a meaningful US Stock market rally can be trusted.
Here’s the US 10-Year Treasury yield chart below. I suspect that given weekly DeMark exhaustion being potentially 1-2 weeks away, it’s going to be difficult for TNX to immediately climb above 5.00%. However, a 4.50-4.75% upside resistance range for 10-year yields certainly makes a lot of sense.
In prior reports I detailed how the stock market cycles showing possible lows in November also lined up with a potential DeMark-related 13 Countdown count for TLT. Thus, while I do suspect that a low is near for both SPX and also US Treasuries, this might prove to be a bottoming process, and still prove to be quite difficult to “catch the exact lows”
Ellliott-wave patterns combined with DeMark exhaustion should bring about meaningful lows within two months
I am in agreement with the folks at Elliott-wave Forecast (Chart shown below) that this Treasury decline since March 2020 has carved out the first 5-wave decline in Treasuries in over 40 years.
This is important, and has two key implications:
- This decline should be nearing conclusion, and likely happens in October/November of this year before a meaningful rally in price (Drop in Yield)
- Following a big Treasury rally into Summer/Fall 2024, rates could begin to press back higher.
The reasoning here is that the first important five-wave decline after a major 40-year bull market in bonds looks to be happening, and the breakout in Yields this past week likely solidifies this as the start of a large rally in yields on an intermediate-term basis.
However, this rally in yields won’t just continue up uninterrupted, and the final wave of the first move up in yields looks nearly complete.
This “should” give way to a decline in yields between October/November this year which would bring about a 38-62% decline in yields which also has some relationship in time.
Industrials still looks attractive, despite the Market volatility
For those posing the very real question of “where do I invest right now?”, there doesn’t appear to be an easy answer for those with a short-term time frame who lack appropriate risk tolerance.
I still like Industrials and Technology, as neither one of these sectors has broken down technically, despite the recent volatility.
Healthcare and most Consumer names remain trending sharply lower. Materials has broken down given recent US Dollar and Yield rallies, and the Defensive sectors aren’t offering much safety.
Utilities is one defensive group which turned up ahead of the stock market decline and this still looks to show some relative strength in the next 1-2 weeks. However, I suspect that any rally in this group likely could prove short-lived and I am not in favor of Utilities longs with any sort of longevity.
However, both Technology and Industrials look appealing, despite the minor consolidation in both in recent weeks.
Industrials shown below in ratio form of Equal-weighted Industrials vs. Equal-weighted S&P 500, (RGI vs. RSP, both from Invesco) remains within a strong intermediate-term uptrend from last Fall lows.
Pullback from July has resulted in this ratio nearing oversold levels, while it maintains a good uptrend. While timing an exact bottom could prove tricky, I don’t mind owning Industrials and feel like this sector continues to demand an Overweight rating.
