SPX and QQQ have both stalled out, yet no proof is yet evidence that price is turning down. It’s thought that Tuesday’s CPI report could be a key catalyst which either results in yields rolling over (which should be bullish for US Stocks) vs. yields rallying sharply (which would result in US stocks pulling back this week)
I have discussed some of the reasons why it’s possible and even likely that this week brings consolidation. These have to do with the following:
- Short-term overbought conditions while weekly and monthly momentum are negative
- SPX, Equal-weighted SPX, DJIA, DJ Transportation Avg., Russell 2k all lie under existing downtrends from late July
- Treasury yields having not sufficiently broken down and a good likelihood of a revisiting of highs sometime this year
- Daily SPX cycle composite that turns lower into 1st-to-2nd week of December
- DeMark-based TD Sell Setups on QQQ and popular names like NVDA, AAPL which might result in large-cap Technology stalling out
- Lack of broad-based participation in the rally, which had seen notable weakness in Healthcare, Materials, Energy and REITS lately
- Recent breadth and momentum divergence last week on the following the early November bounce
- Elliott-wave patterns which suggest an eventual test of October lows
Of course, none of these have to cause markets to turn down following the three-month existing trend of negative monthly prices.
It’s important to note that any ability to break the existing downtrends across the board would raise the importance of the late October lows as having been much more significant than is possible to declare at current levels.
While breadth and momentum did partially improve since 10/27, prices have not shown sufficient progress to claim that a move back up to new highs is underway. It’s been thought (and is still the case) that even on a CPI release that results in Yields pulling back sharply, stock market gains likely would still respect the 80-day trading day cycle which might result in a pullback to early to mid-December before pushing back to new highs.
Overall, any decline back under last week’s SPX lows of 4343.94 would be a technical negative. Conversely, movement above 4430 on a daily close could lead to this rally extending a bit more into late November before peaking. At present, neither scenario can be dismissed.
Treasury yields need to be watched carefully given recent negative correlation with Equities
US 10-Year Treasury yields failed to hold earlier gains on Monday and might be vulnerable to turning back lower to break recent lows.
In my view, any daily close under 4.624% would be an initial sign, and this would be confirmed under 11/10 lows of 4.567%. Any decline under this level argues for a test and break of early November lows for yields.
This would be important, as a breakdown in Treasury yields would generally be seen as technically bullish for this recent Equity bounce to continue in the short run.
Thus, tomorrow’s CPI release takes on special importance given that Treasury yields have wobbled a bit after the initial bounce.
While a yield breakdown (and subsequent rally in Equities) wouldn’t likely prove to last more than two weeks in length, it would likely result in lots of short-covering, and could make the period in late November take on much more importance near 11/27 as having the potential to be a cyclical high.
On the upside for yields, the area from 4.76-4.80% is very important, and above this area, it’s thought that Equities would react adversely given recent correlation trends.
Emerging Markets have begun to look more favorable given the wobbling in the US Dollar
With the recent stalling out in the US Dollar, Emerging markets have begun to strengthen in recent weeks.
While it will take time, in all likelihood, for China to begin to participate, areas within the Latin American Equities market (Mexico, Brazil) look quite attractive and should be favored for 4Q outperformance.
Other areas like Taiwan, and South Korea are also more attractive technically than was the case two months ago.
Bottom line, EEM likely can push higher up to $39.20 which lies near the 50% retracement level of its former decline from July. Additional resistance lies initially at $39.85. Once this has been exceeded, which might be a 2024 development, it would be likely that EEM could move back to test and exceed July highs.
Overall, following a lengthy period where Emerging markets were out of favor, this group is finally starting to come back to life.
Medical Devices starting to turn higher within Healthcare
Given the recent downturn in Treasury yields, the Medical Devices ETF from Ishares (IAI) has successfully broken out above its multi-month downtrend.
This part of Healthcare looks attractive for a bounce following a dismal performance in recent months. While it’s difficult to call for a rally back to former highs, the near-term technical pattern has improved along with daily momentum gauges.
A daily close back over $47.47 would lead up to $51.02, then $52.66, in my view. For now, given that Treasury yields might require an eventual push back towards 2023 highs, it’s difficult weighing in too positively on an intermediate-term basis on Medical Device names. (The correlation has proven quite negative this year between IHI’s underperformance as yields have pushed higher)
Furthermore, Healthcare remains trending down on an absolute and relative basis. However, I suspect that this group looks attractive in the short-run and that a gradual bottoming out process likely has begun. I’ll discuss Healthcare in greater detail when charts start to improve.
Utilities are breaking down after initial bounce
Interestingly enough, Utilities proved to be the worst performing sector in Monday’s trading, despite Treasury yields having moved lower throughout the session. XLU declined -1.19% which was nearly identical to the Equal-weighted Utilities ETF from Invesco’s performance, which lost -1.18%.
This defensive sector has perofrmed largely in-line in Cap-weighted terms with SPX over the past month, but has lagged other Defensive groups like Consumer Staples on a one-month basis.
The underperformance during a time of falling yields while Equities have risen to formidable resistance and have stalled seems interesting technically speaking, and might point to a coming period of furhter relative underperformance.
Technically speaking, Monday’s (11/13) breakdown under the one-month uptrend points to a good likelihood of XLU weakening down to $59 and potentially $58.50 over the next week.
However, the breakdown below former peaks from mid-October would seem to be a technical negative structurally speaking.
Overall, in my view, It will take a rise back over $61.50 to help reestablish strength for XLU, while under $58.50 would result in a retest of $57.04 from 10/23 and potentially a complete retest and break of early October lows.
Bottom line, keeping a close eye on defensive groups is normally important when indices reach important levels. Monday’s underperformance seems to be a technical negative.
