S&P and QQQ are now back to new all-time highs quickly as US Treasury yields have begun their descent. This won’t prove to be a straight shot for either asset class in my view, as the broader market has not yet begun to participate, and some signs of negative momentum divergence remain present. However, a stair-stepping rally makes sense for Equities as Treasuries seem to have shown their hand this week, and June seasonality in Election years remains positive. Overall, a bullish stance remains correct, but with close eyes on other sectors starting to kick into gear in the weeks to come.
Looking back over the past few weeks, this choppy market has proven to be unsettling for Bulls and Bears alike lately, but some consolidation following steep runups are typically common, and can provide opportunity. However, it’s fair to say that the Equity market landscape since late March has been a lot more challenging than the period from last October 2023 into this past March 2024.
Friday’s violent spike in yields failed to derail the Treasury rally that looks to have gotten underway this past week. Both US Dollar and Yields looked to have tipped their hand, and generally should begin trending steadily lower in the weeks and months to come.
The divergences of the various indices also should prove short-lived and gradually more and more sectors are expected to strengthen to join Technology back at new highs.
Consumer Discretionary, Healthcare and Financials have shown some minor evidence of being ready to push higher, while other sectors like Utilities have been weakening. Moreover, Emerging markets have also pulled back, and countries like China, India, and Mexico have all seen their equity markets retreat for different reasons in the past week, despite a declining US Dollar (outside of Friday).
Overall, the hourly chart on SPX looks to be carving out a wave 4-type consolidation which likely will lead higher to wave 5 next week. Many other indices show the same pattern, whether it be NASDAQ 100 as well as Bitcoin.
The conclusion is that a push back to monthly highs should get back underway next week. However, this might prove short-lived if SPX gets to 5400 before some consolidation gets underway.
Bottom line, I don’t view the market’s rally into August as being something which will prove linear and move straight higher. Rather, it should prove choppy, and be rife with sector rotation.
However, I don’t expect any meaningful selling pressure for now, as both Yields and the Dollar should be moving lower over the next few months. Furthermore, bullish sentiment has waned in recent weeks, and from a contrarian standpoint, looks to favor dip-buying in one of the better seasonal months of the year (given historical Election year trends). With regards to SPX, a push back to 5400 could resume next week.
S&P 500
Treasury yield bounce should prove short-lived into CPI data
Despite the sharp snapback in Yields on Friday on the heels of the stronger than expected Non-Farm Payrolls report, the downward trend looks to have been set in motion by the break of May lows earlier in the week.
Many investors had argued that a sharp 40 basis point decline in ^TNX -0.65% ahead of the Jobs number had moved a bit too far too quickly.
However, structurally, the break of May lows was important, technically speaking. Thus, bounces in yields like what happened Friday should set up for an attractive opportunity for Treasuries into next week’s CPI release.
I don’t view it likely that TNX gets back above 4.64% anytime in the next few weeks/months. Thus, this minor “backing and filling” for yields higher should translate into opportunity.
Overall, yields should push lower, and the fact that the entire yield curve has ratcheted higher ahead of next week’s CPI data makes me feel that this might come in on the light side, driving yields back down to test and undercut recent lows.
Bottom line, Friday’s About-face did nothing to change the current outlook. Yields should start to push lower meaningfully and stocks should resume higher as this gets underway.
US Government Bonds 10 YR Yield
China’s setback getting closer to meaningful support
Despite a sharp pullback in Chinese Equities over the past week, the Krane Shares China Internet trust ETF (KWEB -2.59% ) looks to be closing in on two different areas of support that should be important heading into next week.
While most who utilize traditional Technical analysis would agree that a break to multi-day lows that undercuts prior lows is bearish (and this is correct, in my view), KWEB is now hovering right above a very meaningful area of Ichimoku Cloud support.
Furthermore, the peaks of the first rally off the lows topped out at $27.53 (KWEB closed Friday at $28.81.) Thus, price is nearing what should prove to be an area of meaningful support.
Overall, KWEB should be quite attractive from a risk/reward standpoint on any further decline early next week. Other Emerging market countries like Mexico and India also experienced downside volatility this past week and both EWW as well as INDA should find support in the next week as the US Dollar bounce starts to fade.
Krane Shares China Internet Trust
AAII and Fear and Greed polls both show sentiment having sharply contracted back to Neutral levels
It’s important to note that sentiment has certainly begun to retreat in the last few months, as the broader-based rally has still failed to gain much traction.
Despite the move back to new all-time highs this past week with SPX, and QQQ, polls like AAII only show a thin positive margin of Bullish sentiment above Bearish sentiment.
I view that as quite bullish from a contrarian standpoint at a time when Treasury yields and the Dollar index have both made meaningful breakdowns of support.
Such a contraction in sentiment generally helps to give me conviction that any minor consolidation that happens into late June likely should prove short-lived and create an attractive risk/reward for Equities.
AAII Fear and Greed
