Treasury yields likely to pull back sharply along with USD post FOMC

My appearance on CNBC this morning, where I discuss NVDA -1.98%  and more, can be found here.

I continue to see the US stock market as being attractive, technically speaking, and do not feel sufficient risk is there to warrant a selloff at this time. While price action has been a bit more subdued in recent weeks following momentum gauges having gotten overbought, there remain precious little other evidence with regards to frothy speculation to excessive valuation measures that would warrant a major selloff.  Rallies up to SPX-5250-5300 look possible ahead of a possible late March pullback into April.  Both Treasury yields and US Dollar could be prone to trend reversal following this week’s FOMC meeting.

A couple important points heading into Wednesday’s FOMC decision:

1) Markets have begun to show some mean reversion with movement OUT of former leaders like Technology while into Energy, and some Defensive sectors like Staples, Utilities.  However, no material breakdown has occurred, relatively speaking, in Tech compared to the broader market. I suspect this is temporary, and should be resolved higher over the next week, just as Semiconductors have pulled back to attractive support.

2) DXY and TNX have pushed higher to what is pretty important resistance ahead of tomorrow’s FOMC outcome.  As we know the overwhelming odds favor No Change, and what should be important is to get some evidence of Powell’s dovishness that he espoused a couple weeks ago.  Overall, Rates and USD appear to be at a tipping point and I expect both move sharply lower in the months ahead.

SPX hourly chart should likely be resolved by an upside breakout post FOMC.  Note that markets have shown little to no progress in recent weeks, but unless 5100 is broken, I believe it’s more likely that Technology and Semiconductors, specifically, will hold and turn back higher after reaching important support.  Key levels for the next 24-48 hours are 5180 in SPX as resistance and 5100 as support, with a firm bias towards an upside breakout which should carry SPX up to 5250-5300 before stalling out.

NVDA very well could have bottomed

Summary:  Despite its parabolic rally, I find it difficult to avoid NVDA, and don’t have sufficient technical signals to suggest this stock is peaking out, largely based on LACK of any meaningful trend damage. It still shows a tremendous amount of intermediate-term momentum despite some of the churning in recent weeks and I feel like this current NVDA AI event likely will drive this back higher into late March and/or mid-April before some weakness sometime from mid-April into May.  That likely could be an interesting period to consider buying dips for those who are patient. 

When stocks like these, which are in a “league of their own”, start to move up parabolically, then traditional metrics of valuing, whether it be overvaluation and/or overbought conditions, rarely work as planned.  Furthermore, attempting to call a peak in price in stocks like NVDA is notoriously difficult, and relying on actual price weakness is a much better gauge before weighing in too negatively.  I see this likely going to 1100-1200 before this starts to show much consolidation.  (Disclaimer:  I own NVDA.)

Technical reasons for optimism on NVDA:

-Technically this stock still looks to be in excellent technical shape given zero evidence of any weakness.  Momentum having reached overbought levels is rarely an accurate guide to lightening up on positions, as I wrote about a few weeks ago.

-The Number 2 Performer in SPX in Year-to-Date (YTD) terms after 78% gain and up for 10 straight weeks and 15 out of 18 months.

-NVDA requires a move under 834 to even have an inkling of proof that this might be turning lower, and March lows lie at $784.  Overall, I feel that a move to multi-week lows and/or undercutting monthly lows is necessary before weighing in too negatively.

-The recent stalling out does NOT equate to a peak in price, nor evidence of topping out, technically.

-Recall that “overbought conditions” back in Summer 2020, when monthly RSI was at 85, failed to drive the stock lower, it was a sign of acceleration.  NVDA nearly doubled from Aug 2020 to Nov 2021.

-Most Technical AND fundamental methods have simply not worked when trying to pinpoint reasons to fight this uptrend.  So it’s necessary to wait for momentum to rollover and await actual deterioration to weekly and/or monthly lows.

-When long-term momentum gauges like MACD start to rollover on multiple timeframes, it will signal the start of more meaningful consolidation.

-Cycle composites show NVDA to be potentially weak from mid-April into mid-May.. but the weekly Semiconductor cycle composite is largely positive for most of 2024 before peaking in 2025. 

Fundamentally, the following seem important.   (Note, my expertise is with Technicals, not Fundamentals, but the following points have been espoused by Tom Lee and others in defense of NVDA)

–NVDA Forward P/E of 36 actually better in terms of valuation than anytime in the last 2 years. 

-NVDA Free Cash Flow Yield is about 2.9%, not far from SPX +3.6%.. and more reasonable now than 12 months ago

-Only thing really limiting NVDA seems to be its supply constraints.   Companies might be debating switching to B100 from H100 or H200, but NVDA still has nearly all the market share, above 90%.  (Paraphrasing comments from Kujan Semboney-Bloomberg.)

-Risk to NVDA is that their current customers start to manufacture their OWN accelerators, but this will take time.  (MSFT, GOOGL (Bloomberg).)

NVDA has accounted for nearly 45% of NASDAQ 100 rise YTD, and nearly 25% of SPX rise

It’s proper to note that a substantial amount of gains in both SPX and QQQ have occurred given NVDA’s rise this year. 

As shown below, NVDA accounts for a 3.8% percentage of the NASDAQ 100.  Yet, it’s rally has accounted for a substantial percentage change of the overall index.

Note, such a dominating percentage does not translate into NVDA being vulnerable to any setback, nor for the NASDAQ.  However, it is necessary to recognize this change, and watch stocks like NVDA carefully for any evidence of trend change.  At present, the recent sideways consolidation does not seem too bearish and NVDA’s AI event likely can help the stock push back to new all-time highs.

Treasury Yields along with US Dollar might have peaked out for Spring 2024.   Decline expected over next 3-6 months

While no interest rate adjustment is expected in Wednesday’s FOMC meeting, given the Fed Fund futures positioning, the key to tomorrow should center on Chair Powell’s sense of dovishness or hawkishness, and whether he addresses the terminal rate going out to 2025-2026, which would shed some light on the Dot plot.

Powell’s recent dovishness gels with my own thinking that Treasury rates should be peaking out along with the US Dollar following the BOJ’s first interest rate hike since 2007.

The rate decline is based on the following technical reasons:

• Elliott wave theory suggests a top in both US Dollar and TNX is close
• Cycle composites show interest rates pulling back sharply throughout the Spring and Summer
• 10-year and 30-Year Treasury yields seem to be stalling right near prior peaks

Overall, the two key areas on the downside which look to be important are 4.038%, followed by 3.78%.  I expect a break of both levels, leading down to 3.25% into this Summer.  Such a rally in Treasuries should lead to outperformance in Emerging markets and commodities into August of this year.   However, I do not expect yields to remain lower indefinitely.  Following a big pullback in yields into this Summer, some stabilization and a push back higher is possible into year-end.

Treasury Yields look close to peaking and March’s FOMC comments by Powell could serve as the catalyst

My cycle composite for Treasury yields looks to be close to its long-awaited steep slide for Spring-Summer 2024 and tomorrow’s March FOMC meeting very well could serve as the catalyst.

The rally for yields from 2020, 2022 and 2023 lows all looks to have played out fairly accurately thus far.  Moreover, the declines in yield from 2021 and late 2022 also look to have proven fairly accurate. 

The possible projected downward path starts in April and looks to turn down sharply into mid-August before a bottoming, and turn back higher into 2025.

Given that Treasury yields have pushed up to test last month’s peaks in yield, I anticipate that current levels might represent strong upside resistance for yields, and any dovish commentary might result in DXY along with TNX rolling over to begin a lengthy decline.

I’ll discuss this more in detail as more evidence of confirmation arises.  At present, it’s pertinent to share the cycle composite chart which I discussed briefly during my 2024 Technical Outlook in January.

While I expected a bounce in yields, I feel that the last few weeks of bounce in Yields likely might have represented the extent of this move.  Furthermore, rates should now have minimal upside before turning back lower.   The next 5-7 trading days will likely validate this thinking on a possible reversal back lower in Treasury yields.

If/when such a reversal happens, I suspect this might prove bullish for commodities, Emerging markets and help Materials stocks to follow-through on recent strength which has occurred over the last month.  Precious metals like Gold and Silver should push higher into this Summer, and any meaningful drop in Real Yields should prove to be a catalyst in this regard.