US Equities might weaken into 11/22 as Yields lift

Key Takeaways
  • Near-term risk/reward looks unappealing as US indices make bearish engulfing patterns
  • Treasury yields could strengthen back to highs after bottoming on poor auction results
  • Small-caps should be avoided until proper evidence of a larger peak in Treasury yields
US Equities might weaken into 11/22 as Yields lift

SPX and QQQ look to be peaking out following nearly nine consecutive days of SPX gains (which failed on Thursday, and would have represented the longest interrupted rally since 2004.)  However, gains in recent weeks occurred on sub-par market breadth and Technology largely camouflaged the degree to which other sectors failed to participate.   Overall though, the move from 10/27 did look positive and impulsive from an Elliott-wave perspective.  Thus, the bullish pattern from late October suggests that any weakness over the next two weeks likely proves short-lived before a further lift after Thanksgiving. Given that yields turned up sharply on poor auction results Thursday, it’s likely that volatility is approaching for both Equities and Treasuries and Yields could lift into the Thanksgiving holiday.  While the extent of this initial lift off late October highs has been impressive, it should undergo consolidation into Thanksgiving holiday before rallies can continue.   

US Equities might weaken into 11/22 as Yields lift
Source: Trading View

Overall, I suspect that Thursday likely ushered in the peak to this recent US Equity bounce given that prices formed an engulfing pattern and closed near the lows of the session.   This occurred as Treasury yields bounced sharply on poor 30-Year Auction results. 

The entire yield curve shifted higher following the poor Auction results and the US Dollar turned back higher.  Similarly to recent days, Technology initially disguised the weakness in other sectors into mid-day, but the large-cap weakness in Healthcare (XLV 0.70%  -1.5%) and Consumer Discretionary (XLY 1.53%  -1.5%) into mid-day broadened out to additional weakness by day’s end.  10 out of 11 sectors fell in Thursday’s session, and market breadth finished nearly 3/1 negative.

Daily SPX charts below illustrate that SPX failed right near its downtrend, and while QQQ did manage to successfully break its downtrend, this never happened with SPX, DJIA, Russell 2000, DJ Transportation Avg. or most other major US Equity indices.

Small cap weakness is difficult to fight until meaningful proof of a breakdown in Treasury yields

November (thus far) marks the fourth consecutive month of Small-cap weakness relative to Large-cap, as part of a larger intermediate-term downtrend which has been ongoing for nearly a decade.

Two pertinent comments:

  • Small-cap underperformance seems to be directly coinciding with Treasury weakness.  Thus, yields push higher and Small-caps underperform.   Given that I feel there stands an above-average chance of another push back above 5.00% in TNX, any bottoming in Small-caps between now and year-end likely remains premature.
  • Counter-trend DeMark-based monthly exhaustion signals remain premature by at least one month and potentially could take another three months before properly in place.  Thus, while some investors see Small-cap weakness as having reached oversold levels (and they’re right), it’s early to own this group for anyone with a timeframe of less than 3 months.  I suspect that even further weakness happens into December ahead of a much-awaited bounce in the Russell 2000 and S&P Small-cap 600 index, both on an absolute and also relative basis.
US Equities might weaken into 11/22 as Yields lift
Source:   Symbolik

Treasury yields look to have bottomed; Rally back to highs is very possible ( Relevant points also shown below in bullet form)

  • The big pullback in Yields never violated intermediate-term uptrends.  Thus, this minor pullback in yields reached support just as SPX reached its downtrend line and look to have reversed back higher on Thursday (11/9)   Thus, there very well could be a push back to recent highs in yields.
  • Cycles for Treasury yields show a possible short-term peak in December and more meaningful peak in late January/early February ahead of a large decline into next Summer 2024. 
  • Elliott-wave counts on US 10-year Treasury yields show a possible bottoming out in Yields after a perfect ABC-type corrective decline.   Thus, if this count is correct, then yields are headed right back towards recent highs.

Overall, I don’t suspect that yields likely will continue up much more, in either price, nor time.  However, many investors have said that yields have peaked for the year.  Technically speaking, based on the reasons above, I’m inclined to disagree without proof.   A break of 4.35% in TNX would suggest that peaks are in place, and promptly usher in a decline likely down to the mid-3% range.  At present, given bullish intermediate-term momentum and a lack of intermediate-term trend deterioration, I think it’s difficult to say that yields have made their intermediate-term peak just yet.   The 120-Minute US Treasury Yield chart is shown below, with a possible Wave count.

US Equities might weaken into 11/22 as Yields lift
Source: Trading View

AAII has witnessed one of the largest reversals in sentiment seen in years 

Just last week it seemed proper to say that Sentiment was truly bearish as the polarity between bears and bulls had reached over 25% in favor of the Market bears.

Bearish percentages as of 11/1/23 had reached over 50%, which is a rarity the highest in at least six months.

However, the degree of rally in the last two weeks has caused this to make a severe About-face, and this is now positive by 15 percentage points in favor of the market Bulls.  This is one of the largest reversals from bearish to bullish in years, and makes it difficult to call sentiment bearish.

This certainly makes some intuitive sense as many likely do not want to miss any holiday rally, and following eight consecutive days in the traditionally bullish seasonal month of November, the poll results suggest investors are paying attention.

Overall, I suspect that any market selloff over the next couple weeks could help to reign in some of this recent advance in Bullish sentiment.  Furthermore, as the holidays approach, sentiment typically tends to turn more bullish.  In this case, the Israel/Hamas war failed to result in much volatility in risk assets.  Furthermore, the rapid decline in WTI Crude could help inflation, at a headline level, to continue to drift lower.  Overall, here are two sentiment polls below, which seem to have changed rapidly in recent weeks.

US Equities might weaken into 11/22 as Yields lift
Source: AAII, X

Fear and Greed Index is nearly double where it was one month ago

When looking at other sentiment gauges like Fear and Greed index, we see that sentiment has risen fairly sharply from one month ago, and while still under 50%, is more neutral than bullish or bearish.

While other gauges of CTA positioning are also worth considering which help to add to more of an intermediate-term landscape of skepticism, this poll below is often very good at extremes.

Over the last few weeks, however, sentiment has gradually gotten more constructive, which makes sense given the sharp rally over the last two weeks.

While certainly not bullish, it’s also much more difficult to call sentiment as bearish as it was a few weeks ago.

US Equities might weaken into 11/22 as Yields lift
Source: CNN/Fear and Greed.com
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