Near-term trends for US Equities and Treasuries seem to be at resistance, while the US Dollar index has begun to rally. 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. Weakness possible into 12/21
Equities attempted a brief pullback Monday, but this wasn’t sufficient towards thinking markets would extend lower right away with regards to either Treasuries, nor Equities.
Much of this trend uncertainty has to do with Treasury yields which as shown below, failed to break their existing downtrend. This will be important given recent negative correlation trends with SPX, and it’s arguably going to be positive for Yield trends if ^TNX -0.19% climbs back over 4.36% on a daily close.
10Y Yield (^TNX -0.19% )
Overall, I believe it’s right to be somewhat cautious over on the possibility of SPX extending much further without consolidation for the following 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
ITA bullish breakout is important as Aerospace and Defense ETF has just pushed back to new 2023 highs
Technically speaking, gains over the last six weeks have successfully carried ITA -0.13% (Ishares Aerospace and Defense ETF) back to new highs, thanks to meaningful bounces from stocks like BA, HWM, TDG and AXON. which have all risen more than 8% in the past month.
Its gradual ascent over the last three years following a steep 2020 decline is considered bullish technically, and this breakout to new all-time highs should allow for strength up to $130 initially and then further targets near $140.
Overall, Industrials technically remain an attractive sector to overweight heading into 2024. Furthermore, the Aerospace and Defense stocks likely can continue to strengthen following recent technical strength coupled with heightened geopolitical strife given the wars in Europe and the Middle East.
Ishares U.S. Aerospace and Defense ETF (ITA -0.13% )
Gold and Silver have both begun to retreat
As discussed over the last few trading days, Gold and silver likely will need to consolidate gains prior to pushing back to new all-time highs.
Gold specifically failed to meaningfully break 2080 on a close and its volatile about-face on Monday suggests that a minor correction has gotten underway.
Overall, given the technical bullishness in recent price action and momentum, pullbacks likely prove minor over the next 1-2 weeks before precious metals turn back higher.
As seen below, Gold’s pullback today had an enormous range of greater than 150 points from intra-day peak to trough in Spot Gold. The violation of the ongoing uptrend from November should point to a three-wave decline getting underway.
Bottom line, this weakness in precious metals should be viewed as a technical consolidation only, in my view. Any short-term bounce in the next 1-2 days likely won’t persist and could be followed by additional selloffs in Gold over the next week. Support should materialize between 1950-2000, which would constitute excellent support for Gold in the weeks to come.
Thereafter, a push back up to 2200 is likely into year-end, followed by a rise to intermediate-term targets near 2500.
Gold Spot (XAU)
Software has arguably broken out of 5-year downtrend vs. Semis
As discussed last month, Software sector has begun to strengthen relative to other parts of Technology, specifically, the Semiconductor sector.
Ratio charts of IGV 0.04% (Ishares Expanded Software ETF) relative to SMH -2.42% show a breakout in place which has exceeded a lengthy period of declining highs since 2019.
Stocks like MSFT have certainly proven strong in recent weeks. However, other names like CRM -0.88% , CDNS 1.95% , ORCL 0.99% , ADBE 0.13% , PANW -1.61% , and NOW -0.12% have all been showing excellent technical strength lately and are attractive.
While it’s always difficult to project gains following such a lengthy downtrend which is now starting to show signs of giving way to strength, I feel a gradual period of better relative strength is likely in Software vs. Semiconductor stocks in 2024.
The breakout which happened relatively speaking between Software and Semiconductors just happened within the last couple weeks. Thus, meaningful outperformance will likely take time.
However, this looks to be the initial technical catalyst for potential relative outperformance from Software vs. the Semiconductor stocks and should be monitored.
Ishares Expanded Tech-Software Sector ETF and VanEck Vectors Semiconductor ETF Ratio (IGV 0.04% / SMH -2.42% )
