Equity trend is bullish but I suspect that until both DXY and TNX break trendline support the rally might prove a bit choppier into the end of May before a stronger push higher. A broad-based move seems to be approaching, but hasn’t yet been confirmed by a breakout in Equal-weighted S&P 500 nor Russell 2000 index. Overall, while short-term trends have been bullish in SPX and QQQ, the last few days have been lower in Equal-weighted SPX, showing consolidation, despite recent strength in Technology. I suspect this weakness proves short-lived given Tech strength and other sectors should be able to come to the rescue. A broad-based rally should begin by end of month, and momentum and breadth are supportive of further gains into mid-to-late June.
S&P cycle shows an early June lift
The last couple weeks certainly have proven to be a lot choppier than the initial Election year seasonality projections illustrated, but they directly fit in line with what the S&P cycle composite said might be a possibility.
While the SPX and QQQ largely have stalled out in the near-term, the Equal-weighted S&P 500 has proven more negative since 5/15 and many sectors like Consumer Discretionary, Financials along with Industrials and Healthcare have traded lower.
Overall, the domination of Technology performance to help this sector roar back into the lead on a 1-month and 3-month basis performance-wise hasn’t helped the market advance much since mid-May.
While some investors might expect that Technology might lead for the balance of the year while other sectors underperform, it’s still difficult to envision that scenario technically speaking.
I expect that Interest rates turning back lower should be beneficial to kicking off a broad-based rally in June which might last into August or early September before consolidation into the US Election.
Interestingly enough, the downward slope of the SPX cycle composite during the last two weeks of May seems to have fit in line with what the Equal-weighted SPX has done, more than the SPX cash index itself.
Thus, Technology has outperformed, but yet the broader market has weakened. Importantly, this looks to be coming to an end as the month of May concludes by Friday of this week. June is likely to get underway with a rally back to SPX 5375-5400 and a decline in Treasury yields might prove to be the technical catalyst.
The upcoming Economic releases for Friday (PCE Deflator), next Monday (PMI and ISM data) along with the ISM Services data and Payrolls information later in the week could be important in coinciding with a possible peak in Treasury yields. CPI for June is announced on 6/12, but I expect that yields likely begin turning down before this date.
SPX Cycle Composite
US 10-Year Treasury yields should not exceed 4.74% before turning lower to undercut 4.00%
Interestingly enough, rates have spiked higher to kick off this shortened holiday week, but Treasuries very well could face some demand as the month comes to a close heading into some important economic data.
Rebalancing needs coupled with extension demand could very well provide a bid for Treasuries after yields have neared former peaks.
Technically, it’s likely that yields could peak out given the combination of the following reasons:
- Elliott-wave formation seems to show a much more impulsive decline in yields from April than the subsequent bounce
- Cycle composite peaks in April show a sharp follow-through lower in June into late August/early September for yields
- Follow-through of weak economic data vs. expectations after the recent large decline to two-year lows
Overall, it’s vital that TNX remains below 4.74% for this bearish scenario to play out. Moreover, yields backing up to within 13 basis points of this key level creates a very favorable risk/reward for those seeking to add duration into a new month on any rebalancing. Bottom line, the next couple weeks should be vital in reinforcing the idea of yields (and by extension, US Dollar) moving lower, or breakouts happening in Yields (which is an alternate scenario I don’t expect)
10 Year Treasury Note Yield
Energy requires some close scrutiny after continued weakness
The weekly chart of XLE below now shows five weeks of declining prices out of the last eight weeks, as the recent breakout to new highs into early April looks to have been proven false.
Weekly MACD has now officially rolled back over to cross below the Signal line, which indicates a possible bearish trend taking hold.
Despite WTI Crude having seemingly reached support in the high $70’s, it’s going to be increasingly important to keep a close eye on Energy as a sector given recent underperformance.
Cycle composites look to turn lower in June and might extend lower into July as part of a larger intermediate-term decline in Crude oil.
The TD Propulsion target for weekly XLE looks to intersect near $85, or more than $5 lower than current levels. In addition, Equal-weighted Energy could possibly confirm a monthly TD Sequential sell in Energy with a month-end June close below $74.95. However, confirmation of a sell becomes far easier potentially in July, as a month-end July close under $83.13 would accomplish this feat.
Overall, there’s no technical change at this time to my technical view of Energy, but the failure to mount any type of rally into June would force me to seriously contemplate lowering Energy to Neutral. Technically it’s difficult not to lose some confidence given the continued inability of this sector to show much technical strength.
S&P 500 Energy Sector
S&P Breadth numbers still show US Equity market to be in good shape
When eyeing the percentage of stocks within 20% of a 12-month (52-week) high, we see that this number still hovers in the low 80’s, which is a positive.
As shown below, this figured started to nosedive in mid-2021 ahead of the bull market peak for most US indices on 11/17/21, which then happened for SPX on 1/3/22.
While some investors complain about the lack of a broad-based rally lately, the late 2023 push higher in many sectors still helped to lift this number to above 80%, and it’s largely remained at that level ever since.
A larger decline down to the low 50’s would be a potential concern towards thinking the market might be losing momentum as fewer and fewer stocks are within 20% of 12-month highs.
However, at present, I don’t view current levels as much to fret about, technically speaking. Any downturn in rates which helps Small and Mid-caps rally along with helping sectors like Financials and Healthcare rebound should be instrumental towards helping this rally into August.
Overall, this is one popular gauge of broader market breadth I often utilize. However, the key takeaway from current readings is that not much concern is warranted given the high number of stocks trading within 20% of 12-month highs.
S&P 500 Breadth
