Near-term trends for US Equities might seem to have accelerated on Friday’s Powell Speech, but SPX remains under the key 4600 level. A majority of the major sectors are also now right near meaningful intermediate-term downtrends. Until we can see proof of downtrends being convincingly broken across the board, I still view current levels as being a poor risk/reward for new investments without consolidation.
US Dollar attempted to bottom out Thursday with its breakout, but Treasury yields remain oversold and trending lower. Precious metals, Crude oil, and Cryptocurrencies are attractive technically, and it remains correct to be selective with Equities until consolidation can play out.
The near-term range-bound trading range of recent days appeared to give way Friday on very positive market breadth. While I expected Equal-weighted Technology and Financials ETF’s to hold July highs, it looks like these levels will be exceeded early next week. Both RYF and RYT show DeMark exhaustion to potentially arrive within two trading days.
Overall, I don’t feel Friday changed the technical picture for a few important reasons:
- SPX remains under 4607.07, the July 2023 peaks
- TLT remains under $94 which aligns with a meaningful downtrend
- 9 of 11 S&P GICS Level 1 sectors have rallied to within striking distance of intermediate-term downtrends
- US Dollar seems to be bottoming
- Sentiment has gotten increasingly more optimistic in recent days
- Cycles show a downward bias into 12/21
- Seasonality remains sub-par until mid-to-late December
However, I do not wish to attempt to fight this rally. If we see evidence of these levels giving way, then I’m fully onboard with expecting a melt-up rally throughout December, which then would likely have to be “paid back” in January. To reiterate, markets have not reversed course, and until they do, it’s difficult to attempt to fight trends. Cryptocurrencies, Metals and Energy look to be more attractive long choices for the next month than Equities without consolidation.
Next week likely brings about a “moment of truth” with regards to SPX and July highs, which will be important to pay attention to.
Russell 2000’s Ishares ETF, IWM 0.15% , will need to exceed 191 to expect it’s breaking out, and this seems like a more unattractive risk/reward given that rates have gotten oversold. Any sudden snapback in rates would likely adversely affect IWM. At present, I expect 191 holds as resistance.
ishares Russel 2000 ETF (IWM 0.15% )
TLT getting close to resistance $94 looks like resistance
Technically speaking, TLT is hovering just below important resistance which will be necessary to exceed to have hopes of a continued Treasury rally.
TNX managed to drop under my preferred support zone this past week. However, yields arguably have gotten quite oversold at a time when sentiment has become quite bullish on Treasuries extending (yields continuing lower).
The key technical target in the short-run for those curious about TLT is $94. I don’t’ expect an imminent breakout above $94, and this area should be tested early next week.
To have real confidence of an interrupted December rally in Equities and Treasuries, market bulls need to hope for a big breakout in Treasury ETF’s like TLT along with SPX to get above 4600. Additionally, it would be helpful for IWM to exceed $191. At present, this looks like a tall order, but next week should bring about our answer.
ishares 20Y Treasury Bond ETF (TLT)
Gold and Silver both near critical near-term levels, similar to Equities
As discussed over the last few weeks, precious metals are technically bullish and both Gold and Silver likely can push back to new all-time high territory during this cycle of metals strength.
This has occurred as real rates have fallen, and US Dollar has retreated. Now, gold is nearing its important resistance near $2080 which has held a few times already in the past few years.
If ^TNX -0.96% can plunge under 4.00% and Dollar continues straight down, then I expect this happens sooner than later. However, my expectation has been for Treasury yield and the Dollar to turn back higher. If this happens, then the metals rally likely will stall out in the near-term.
For those who are short-term oriented, I feel that a stalling out in Metals might very well occur next week which might coincide with the Dollar following through higher on Thursday’s technical breakout. Yields, to their credit, have plunged even further, and have not shown evidence thus far of reversing course.
As shown above in the TLT chart, if TLT holds $94 in the next few days and does not breakout, then I feel this also will be important technically as a reason why the metals might retreat.
Bottom line, while not being bearish on Gold nor silver, at current levels, it’s going to be important for resistance to be exceeded on Treasury ETF’s like TLT along with Gold to get above 2080 to help this move in the metals continue.
From a risk/reward perspective, it makes more sense to hold off on new long positions technically until prices either retreat to consolidate this move, or show firm evidence of breaking out.
Gold CFD
Russell 2000 implied volatility is meaningfully below realized volatility
Given the VIX’s plunge to 12.62, which is “a tad” higher than last week’s close, positively diverging despite indices having pushed higher on Friday, implied volatility remains at the lowest levels in VIX since the 2018-2019 lows.
While it’s difficult and “grinch-like” to attempt to fight the current trend, it’s worthwhile to recognize that Implied volatility has fallen to levels which historically have represented buying opportunities for “Vol”.
This looks particularly unusual given the levels of cross-asset volatility along with the uptick in geopolitical tension in recent months.
With regards to Russell 2000, it’s Ishares ETF, IWM 0.15% ’s own implied volatility levels sit at 3 year lows and trades currently at a multi-year discount to realized volatility, roughly 35% lower.
Weekly IWM charts going back over the last few years show implied volatility in blue, while realized volatility is shown in the color white.
Overall, I believe owning implied volatility on a 2-3 month basis is attractive for Russell 2000 along with expecting that the cheap levels of implied volatility on VIX might have gotten stretched a bit too far, too quickly. I expect VIX could move to 16-18 sometime in the next few months, and owning “vol” here makes sense.
ishares Russel 2000 ETF (IWM 0.15% )
