10-Year Real Yields hit highest level since 2011

The breakdown in US equity prices ahead of a well telegraphed 75 basis-point hike this week doesn’t’ necessarily constitute a chance to buy dips for those who typically expect mean reversion, and price trends remain negative and not oversold.  Interestingly, there has been some minor positive divergence in S&P and NASDAQ futures compared to cash levels ahead of the FOMC meeting, which have managed to hold early September lows and not follow through lower.  However, wave structure and a lack of capitulation still point to a bit more weakness into early October before any real relief.  While parts of Technology such as Tech Hardware and other downtrodden Discretionary groups like Casinos and Cruise-liners have proven resilient in recent sessions, this certainly isn’t enough to go on to expect any type of meaningful reversal.  Any bounce post FOMC likely should still lead to chances to sell for trading purposes, as SPX looks to have a date with 3700 and below in the next couple weeks.  Opportunities to buy shouldn’t materialize until early October, and it’s right to “keep some powder dry” to buy dips.

10-Year Real Yields have hit the highest levels since 2011  

• 10-Year yields on inflation protected debt have hit the highest levels since February 2011 as markets seem to be aggressively pricing in tighter financial conditions.

• There remains negative correlation between Gold and 10-year TIPS.  Yet technically this move has already played out while Gold has declined.  Technically speaking this should be ready to reverse in the next month

• My technical analysis on Gold and Silver shows the precious metals to likely bottom out next month and rally into end of year.  Given that Real yields have gotten very stretched, a reversal of trend looks near and likely happens in October 2022.

• One can really not call this a true breakout as we’ve seen 2018’s lift carry briefly above 2013 highs before reversing. My thinking is the same could happen in 2022.

Overall, I expect that this minor breakout proves to be the final push higher in real yields and subsequently weakness in precious metals into October, but that sentiment and cycles give way to a reversal in the weeks ahead.

TNX DeMark indicators close to exhaustion

While many large institutions have begun to nibble on Treasuries with yields spiking up, one can also make a technical case that a reversal is right around the corner.  $TNX will show a confluence of “TD 13 Countdown Sells” on another potential two weeks of strength.

As a reminder, pushing up to 3.60-3.70% by early October could result in both weekly and monthly TD Sequential and TD Combo indicators to show confluence of exhaustion that I believe will allow for a big reversal in Yields next month.

This should directly lead stocks to potentially bottom out and rally if this correlation continues, and 2022’s trading behavior hasn’t given us much reason to doubt this will continue to hold up.

To reiterate, Yield reversals should happen based on 4 key reasons:

1. Yields have gotten overbought on multiple timeframes
2. DeMark indicators look close to lining up to show exhaustion on weekly/monthly basis
3. Sentiment has begun to get understandably more negative on Treasuries
4. Cycles start to exert downward pressure on yields from October into early next year

Pharmaceutical stocks likely find some footing in October

The recent decline in Pharma names over the last months has caused some deterioration in daily charts, which had previously shown this group as being in very good technical shape.

While the long-term uptrends remain in good shape, the short-term technical decline looks likely to extend into the month of October before bottoming.

Importantly, the first leg down of 2022’s weakness occurred as a corrective three-wave decline.  Thus, while summer lows were just broken in the last few weeks, which should give way to additional selling pressure, this doesn’t seem to be the start of a larger top.

Dip buyers should have opportunity to average down and/or buy the drug makers down with support near 712 in the DRG index, which could present a chance to buy for a Q4 rally.

Prior early 2022 reports discussed stocks like $PFE and $LLY, $MRK, $BMY as being attractive long-term buy-and-hold candidates, and this remains the case.  However, recent technical selling means that this group remains under pressure but could offer some opportunity to buy weakness on pullbacks into October.