US Equity markets likely have begun their trek back to test July 2023 highs. Both US Dollar along with Treasury yields are likely to show further deterioration in October, but also could show some backing and filling in the near-term this week. The expansion in breadth has been a slow process to a market that’s been rather narrow for the last month. However, the recent improvement in many former lagging sectors coupled with bearish sentiment remain reasons to be constructive for the back half of October.
The resilience in sector strength out of Financials along with Small-caps, Mid-Caps and Transportation Stocks is thought to be bullish for a market that appeared largely unchanged based on SPX and QQQ’s closing price.
Despite US 10-Year Yields spiking back to near 2023 highs along with 2’s, 5’s and 30-year Treasury yields, both 10 and 30-year yields failed to exceed intra-day/week highs from early October.
Specifically with regards to SPX and QQQ, the patterns have improved over the last week, and while yields pressing higher was formerly thought to be bearish for US Equities, stock indices have been able to press higher despite this move in rising yields.
In Tuesday’s trading, a flat market certainly didn’t tell the whole picture (as explained partially above) as RSP the Invesco Equal-weighted S&P 500 index, rose nearly +0.50% on the day.
SPX’s pattern rose above the minor consolidation of the prior five trading sessions before finding resistance near the open gap from 9/20 into 9/21 near 4401. Note, this level lies directly below another important area at 4412, marking a 50% retracement of the entire range from July. Additionally, the downtrend from July intersects near 4435.
Thus, many feel like SPX might have some work to do before truly turning bullish. However, my work suggests that the wave structure currently coupled with the improvement in many other parts of the market which weren’t working well initially but have kicked into gear of late (namely Financials, Small and Mid-caps, and Transports) are positive factors that suggest the next 2-3 weeks should be bullish.
While widely not expected by the investing public, any move over $4435 in SPX is likely to push up to test and exceed early September highs and potentially reach July’s peak before some consolidation plays out in November.
There lies a key cycle period in mid-November which does have the potential to be bearish, that starts near 11/13 and might last throughout November. My thinking is that SPX should rally into this period before a possible short-term peak. However, the bigger takeaway is that while October should prove bullish based on technical, sentiment and seasonality, November actually has the potential to be negative this year in my view. I’ll share more on this in the weeks to come.
For now, investors should have this SPX daily chart “Front and Center” and should respect any move initially over 4401 as being quite positive.
Financials looks to have turned sharply higher relatively speaking; This can be helpful for SPX into year-end
Don’t look now, but the Equal-weighted Financials sector ETF, as measured by RYF, has just confirmed a monthly TD Sequential and monthly TD Combo “13 Countdown buy” signal as of September’s month-end close.
In plain English, this means that Financials are likely to continue showing good relative strength in the back half of 2023, and I expect this group to outperform into December.
While the broader chart pattern in ratio form of Financials to S&P 500 on an Equal-weighted basis does not appear too bullish on a monthly basis over the last decade, it’s been necessary to pick spots for outperformance and underperformance for this sector.
This latest ability of KRE and the Insurance sector to both break out (which I’ve written about over the last week) looks constructive, and Financials looks likely to strengthen further in relative terms to the S&P 500.
Upon reaching end of year, I’m skeptical that it’s right to have an intermediate-term bullish view on this sector without much further technical progress. However, in the short run, Financials looks quite positive technically, and I expect this recent strength can likely follow-through higher.
Overall, despite rates pushing up lately, US Equity markets have begun to successfully absorb much of this Treasury weakness, (Rates going higher). Moreover, as I discussed yesterday the correlation between Treasuries and Equities has actually been decreasing of late.
Bottom line, I do still feel that rates are close to peaking out, but from a traditional trend following perspective, this will require a move back under 4.40% at a minimum from TNX. Cycles, sentiment, seasonality and Elliott-wave theory are difficult to utilize as a means to fight the current uptrend if yields aren’t cooperating. However, this time for yields rolling over should begin to materialize in the days/weeks ahead.
Regionals, or Money Center Banks?
The chart below tells the whole story, and makes it difficult to favor either KRE, or KBE at this time among the Financials sector.
Trends remain bearish from late July in the ratio of the Regional Banks ETF (KRE) vs. SPDR S&P Banks ETF (KBE). While there’s been some minor stabilization in this ratio in recent weeks, it’s insufficient to call for outperformance out of the Regionals.
This latter point likely could depend on rates rolling over, which as we’re all aware, has not materialized just yet.
On an absolute basis, however, both KRE and KBE are attractive for gains in the weeks to come. Both showed breakouts in Tuesday’s trading which exceeded one-month Reverse Head and Shoulders patterns as well as exceeded the entire downtrend from July, nearly three months ago.
Bottom line, I feel that both KRE and KBE can work well in the weeks to come. I’ll spend some time in future notes outlining some of my technical favorites among the Financials sector given this week’s constructive movement.
Below is a snapshot of KRE vs KBE, which as discussed above, hasn’t shown sufficient strength to favor the Regional Banks.
IAI has trended lower over the last month vs. KBE relatively speaking
Despite the early year success in Investment banking names within the Financial sector showing extraordinary strength, many of the investment broker and banking names have been laggards compared to the KBE over the past month.
Thus, while I’m open to this potentially changing, particularly if the stock market should push higher into late October, I’m not willing to favor IAI (Ishares Broker Dealer and Securities Exchanges ETF) relatively speaking on a short-term basis.
Overall, both KBE and KRE along with KIE (insurance) look to be appealing ways to participate in a rally in the Financials sector between now and mid-November and look more appealing than IAI.
While I highlighted Insurance in yesterday’s note, it’s the broader Banking space which deserves focus following Tuesday’s session as being a source of strength which can likely continue into November.
As shown below, the intermediate-term trend in IAI vs. KBE is quite positive following the early 2023 breakout. Yet, the near-term consolidation in IAI doesn’t seem complete relative to KBE. Thus, in this case, KBE would be favored in the short run, for those with a short-term time horizon.
