US Equity indices are likely starting to turn back higher to new all-time highs into mid-July (QQQ and SPX accomplished this today) despite the growing drumbeat of skeptics warning of possible 3Q implosion for stocks. I sense that Treasury yields should be starting to pull back to new monthly lows in the near future and US Dollar likely should follow suit. Overall, cycles, seasonality, and ongoing strength in Technology argue for a bullish stance in US Equities into at least mid-July into and after the July 4th holiday, which might last into July expiration before some backing and filling. While Technology should lead US Equities into mid-July, increasingly, sectors like Industrials, Financials, and Large-cap Discretionary are showing evidence of strengthening a bit, which could bode well for these sectors to start to join suit and participate in aiding market strength. SPX targets could materialize between 5650-5750 before any consolidation gets underway.
Overall, as discussed in yesterday’s note “It’s thought that the combination of FOMC Chair Powell’s comments on Tuesday along with Christine Lagarde could reflect more of a dovish tone that allows Yields and the US Dollar to begin to work lower.”
Given the rise in correlation between Equities and Treasuries, it’s thought to be positive for US risk assets as Treasury yields start to work their way lower.
Equities are now entering a very bullish part of the Summer ahead of the July 4th holiday, where SPX normally shows strong gains in the first part of the month.
As the chart shows for the NYSE Fang+ index (NYFANG- Bloomberg) Technology has managed to successfully power higher back to new highs despite some minor lagging lately in the price of NVDA.
While NYFANG index pushed back to new all-time highs this week, we’ve begun to see some mean reversion with TSLA 3.57% carrying the charge, while NVDA -0.14% has been lower by over 2% in the last week.
I feel this is a healthy rotation and still feel NYFANG index pushes higher over the next 1-2 weeks ahead of a possible late July stallout.
Ratio of LQD to JNK has begun to break down
One common ratio I find helpful when looking at Fixed Income is to study the ratio of LQD (Ishares IBOXX Investment Grade Corporate Bond ETF) vs. JNK (SPDR Bloomberg High Yield Bond ETF) for evidence of breakouts or breakdowns.
Normally, breakouts indicate a lagging in High Yield corporates which eventually might prove problematic to risk assets.
The current market is showing the opposite as LQD has just broken down vs. JNK. Technically speaking, one can take this to mean that High Yield corporates are starting to show some outperformance.
This normally can be a sign that a rally in risk assets might be starting, or beginning to accelerate which I feel is possible between now and mid-July.
While the Options Adjusted Spread (OAS) has been slowly rising and will be something to keep a close eye on in the months to come (not shown), I take the breakdown below to mean that High Yield corporates are performing well enough vs. Investment grade corporates that this spread has begun to weaken back to new multi-week lows.
Summation Index has pulled back in recent months, but could start to lift in the weeks ahead; Here’s Why
McClellan’s Summation index is a gauge that many use for market breadth, and lots of investors have been understandably concerned that US Equities have been dominated by Technology while many other sectors have not participated.
This lack of broad market performance is shown by this Summation index having weakened in recent months.
However, an interesting development has appeared with regards to momentum which has been positively diverging on weekly Summation index charts.
As this chart shows below, the Summation index has fallen to new lows for the year, but momentum gauges like MACD have held up in much better shape and are on the verge of making a bullish crossover of the signal line.
Given that I feel that Treasury yields should be rolling over and Stock indices turn higher over the next couple weeks, this very well might coincide with the start of a bounce in market breadth which has been “a long time coming”.
I’ll monitor this in the weeks ahead, but it doesn’t seem as negative when considering this positive momentum divergence as it would on first glance.
Homebuilders/Home construction stocks remain a source of weakness
Recent weakening in Housing data seems to have directly correlated with many Homebuilding stocks having started to show technical deterioration.
As can be seen below, the XHB 0.93% (SPDR Trust, SPDR Homebuilders ETF) has officially violated support going back since April of this year.
This brings XHB’s price to the lowest levels since February and looks to be putting pressure on the Equal-weighted Consumer Discretionary ETF’s, like RCD, which is nowhere near as strong as XLY 0.96% which recently moved to new two-year highs.
Overall, given that Lumber prices have begun to show severe weakness over the last couple years (Lumber is down by 75% to $344 from its March 2022 peaks above $1400 ) and real interest rates have been slow to come down, Homebuilders have been underperforming lately.
XHB 0.93% closed Tuesday 7/2 at $98.43, and the violation earlier in the week of $100.61 looked like a negative technical development. Additional weakness looks possible to the low $90’s before this can stabilize and start to bounce. At present, Homebuilders could underperform into the Fall before starting to rally.
