US Equity indices look to have begun some minor consolidation which I expect should prove short-lived in duration and scope before turning back to new highs. The miss in CPI on Thursday looked to be a specific catalyst for both US Dollar and Yields to have turned down sharply and declines in both look likely in the weeks and months to come. Equal-weighted SPX has begun to show some strength over the last week, and needs to be watched for evidence of a breakout which would be convincing that a broad-based rally had gotten underway. At present, it’s difficult to make the call for any sort of meaningful Equity peak as the correlation remains quite strong between Treasuries and Equities and Thursday’s breakdown is meaningful in TNX. Overall, while a 2-3 day pullback is certainly possible and might be overdue on some accounts, I am skeptical that SPX gets under 5450 while QQQ has strong support near 485 that makes this an attractive risk/reward.
As this chart shows below, QQQ has made a breakdown to multi-day lows on its daily chart, but remains well above its ongoing uptrend. A minor pullback in NVDA, ARM, LRCX, and AMAT of more than 4% has caused QQQ to dramatically underperform SPX.
However, I don’t suspect that 480 will be broken right away on QQQ before prices stabilize and turn back higher. As discussed yesterday, the area at 505-510 looks quite reachable, and expect this could be a more important area to consider in the weeks to come.
Nasdaq QQQ ETF
Equal-weighted S&P 500 has begun to turn higher on Yield breakdown
Some minor mean reversion happened on Thursday as Equal-weighted S&P 500 turned higher to multi-day highs while SPX and QQQ both fell to multi-day lows.
As seen below on Bloomberg’s daily chart of SPW, the S&P 500 Equal-weighted index, prices have largely trended sideways since March, and the broader market in Equal-weighted terms has proven far more subdued than SPX or QQQ.
This doesn’t translate into a market correction being imminent, particularly as the Equal-weighted S&P is making progress higher. However, a breakout is needed to have more intermediate-term conviction for the back half of the year heading into a tough seasonal time in the months ahead.
I suspect that the area at 6750 for SPW should be important as resistance, which when broken would kick off a larger broad-based rally. Despite today’s progress thus far, it’s difficult to make that claim. However, Financials, Industrials, Discretionary and Materials should be well positioned to help SPW engineer a breakout into this Fall.
S&P 500 Equal-Weight Index
US Dollar weakness should now begin to accelerate after breakdown
Weakness in the US Dollar is one of the most important technical developments in the last few weeks and makes a period of Dollar weakness likely into the Fall.
US Bloomberg Dollar index, below, has less exposure to the Euro and Pound Sterling than DXY, which makes this breakdown a bit less distorted, than when watching DXY itself.
However, this is the decline that cycle composites have been suggesting was possible for the period between now and September, and should lead both US Dollar and Treasury yields lower.
I suspect that Emerging markets and commodities might experience strength in the weeks to come, and a sharply falling US Dollar should also be generally supportive of rallies in risk assets.
I am expecting a test of the lows from December 2023 and should be an area which generally provides support initially after a larger than expected selloff.
Thereafter, a Dollar bounce might begin in 2025, given that US likely remains far stronger than most of Europe.
US Bloomberg Dollar Index
TNX breakdown to multi-month lows should result in additional weakness in yields
Today’s move following this morning’s CPI report is equally bearish for Treasury yields across the curve.
The rally in Treasuries is being led by 5-year notes (the so-called “Belly of the curve”) but we’re seeing some Bull steepening as the front end (2-year) is falling faster than the long-end (30-year)
I expect that TNX should accelerate down to challenge and likely breach 4% before a bounce gets underway this Fall. This would directly coincide with what cycles on Treasuries have been projecting.
Yet, the weekly cycle composite for Treasuries indicates possible weakness in yields into early next year. Thus, a bounce in yields might happen as Equities show consolidation from September to November only before continuing their descent into next Spring.
Thus far, bad news on the economy has proven to be good news for US risk assets, and I don’t see that changing too dramatically just yet as FOMC’s rate cuts are brought forward and the picture for “when and how many” rate cuts becomes a bit clearer.
At present, it looks right to own TLT for a move to the high 90’s as yields fall in the weeks to come.
USG 10Y Yield
