Technically the broad-based participation higher in multiple sectors in the last month is certainly a positive heading into 2024. While near-term risk/reward doesn’t seem favorable for those with timeframes less than two to three months, the recent overbought readings have not signaled any evidence of giving way. I’ll be watching for evidence of any hint of trend reversal in the days ahead. If this fails to materialize until January, than a larger than normal correction likely would occur into February of 2024.
US Equities and Treasuries have largely extended further than what was believed possible a few weeks ago and DJIA has now reached new all-time highs while NASDAQ 100 index and QQQ, not to mention SPX are right below all-time high peaks. Equal-weighted SPX has also now exceeded July 2023 highs to reach the highest levels since April 2022.
Bottom line, the trends have proven resilient in both Equities and Treasuries and there hasn’t been sufficient evidence of trends giving way to expect a short-term reversal. Seasonality studies along with short-term cycles which had hinted of early month consolidation have not worked as planned. Small-caps, Energy, Materials, Discretionary stocks, along with REITS, Communication Services, and Technology have all demonstrated extraordinary strength in recent days.
On a personal, non-technical note, the act of having reclaimed new all-time highs in DJIA so quickly while US 10-year yields have cracked 4.00% seems downright scary, as much of my early 2024 plan is happening much quicker than anticipated. However, this move is quite constructive for investors with an intermediate-term timeframe heading into next year.
As discussed during my 2024 Technical Outlook call today, I expect that 2024 should prove easier in many respects than 2023 has been for investors. As can be seen, Equal-weighted S&P 500 vs. ^SPX fell sharply nearly the entire year. This demonstrated how many sectors failed to keep up with the “Magnificent 7” stocks within Large-cap Technology.
I expect that many sectors likely might outperform SPX next year, vs. this being largely concentrated in Technology up until the last month.
As shown below, the ratio hit a meaningful level of long-term monthly support and has now begun a meaningful reversal in the last few weeks off these levels. Both weekly and monthly ratio charts of RSP to SPY show a good likelihood of a bounce in 2024 as Equal-weighted S&P starts to show better relative strength out of a dismal 2023.
The key takeaway has less to do with Technology underperforming, but more to do with a broad-based level of participation happening across many sectors.
RSP / SPY
SPY vs. TLT chart shows that the Treasury move has proven even stronger than the rally in Equities
Incredibly enough, despite SPX having pushed higher by more than 13% off the October 2023 lows, the movement in Treasuries lately has proven even more impressive.
The ratio chart below of SPY vs TLT (Ishares Lehman 20+year Treasury ETF) has broken down from its sharp uptrend which turned more parabolic this past Spring 2023.
Momentum indicators like MACD have rolled over to negative, and show that the decline in Treasury yields has proven even more pronounced than the rally in Equities lately.
The key takeaway from the chart below is that Equities could underperform Treasuries in the weeks to come, which might be a combination of better Treasury strength than Equities. Conversely this might occur on any mild consolidation in the Equity market, where yields don’t bounce as sharply as expected.
If the last few weeks have taught us anything, it’s that the widely reported “death of 60/40 positioning” has proven premature, and both Treasuries and Stocks have done phenomenally well in recent weeks. However, from a trend following perspective, Treasuries could still demonstrate some near-term outperformance vs. Equities (As shown in this chart below, SPY might decline further in the short run, vs TLT).
SPY / TLT
Breakdown in Yields has far exceeded short-term expectations
It’s not wrong to say I vastly underestimated the extent of the Treasury Yield decline in recent weeks and did not expect an immediate break of 4.00%. While I did start to discuss a 4Q 2023 Treasury rally back in late September/early October, anticipating yields to turn down, the severity of this initial pullback has been a surprise.
As can be seen, ^TNX has violated the uptrend from early 2022. This is a bullish intermediate-term development for Treasuries in 2024 (Bearish for Yields, thinking yields decline further into next Summer)
However, there seems to be ample downside Ichimoku-based support near 3.60%, and the risk-reward for near-term Treasury investors seems sub-par.
Once evidence arises of a bottoming in yields which should come about between now and mid-January, I will be able to project possible levels of a counter-trend bounce. Thereafter, yields are likely to turn back lower in 2024 and my projections are a TNX decline to 3.25% and a possibility of 2.75%.
Most of the cycle composite studies suggest that following a three-wave decline in yields into next Summer, Treasury yields should begin to push back higher into late 2024. At this point, it’s early to attempt to forecast when this should occur, and simply correct to examine the recent decline carefully for any evidence of stabilization.
Bottom line, this Treasury rally has gotten ahead of itself in my opinion in the short run. However, following a bounce, an equal-leg decline could get underway from February into next Summer in 2024. Thus, if the correlation between Treasuries and Equities continues, than the first half of 2024 might turn out to be better than what many investors expect.
However, at some point, both Stocks and Treasuries will require some consolidation. If this is postponed until mid-January, then a larger than average decline likely will happen into mid to late February and/or into March before the rally can continue.
UST 10Y Yield (%)
NY FANG index vs. S&P still doesn’t make a compelling case to selling the “Magnificent 7”
Ratio chartts of Bloomberg’s NY FANG index has begun to wither a bit vs. Equal-weighted S&P 500 etf (RSP) in recent weeks.
This minor consolidation makes sense when studying the degree of positive mean reversion which has happened in formerly beaten-down sectors like Financials, Consumer Discretionary, REITS and Healthcare.
However, uptrends remain intact in relative terms, both from late 2022 along with Summer 2023. The conclusion is that it’s right to still own these high growth stocks within Technology, and until/unless this relative chart starts to break down more sharply, this will still be a technically sound area to favor heading into 2024.
NYSE FANG+ / Invesco S&P 500 Equal Weight
