This week’s weakness largely followed suit to the various cycle composites I’ve been discussing that warn of a selloff into 12/21-12/23 before much relief into end of year. Recent performance has been overwhelmingly defensive in nature, while Treasury yields have shown initial evidence of bottoming out. As I’ll show within this report, the US Dollar is also nearing important support, and both DXY and TNX should begin to exert some upward influence into mid-to-late December which could prove to be a headwind for risk assets. Overall, technically, this week’s pullback held where it needed to initially, but the bounce likely will not push up above 4100 into/after FOMC. The base case scenario suggests a peaking out and decline back under 3900 which would result in US Equity weakness into December expiration. While I remain open to any outcome, the odds suggest that 4050 contains any bounce into Tuesday/Wednesday before the start of a breakdown to challenge and violate 3900. Bottom line, bounces into next week look sellable while Defensive sectors should be overweighted for the next two weeks.
US Still underperforming after break of 2-year uptrend
The recent 10-15% bounce from October lows in US Stocks might seem impressive to most market participants who are expecting continuing downward earnings revisions. However, the rally has proven to be far stronger abroad, and countries like Europe and Asia, not to mention Latin America have witnessed far more robust movement off the lows with arguably weaker economic conditions.
The chart below highlights the S&P 500 ETF ($SPY) vs. the Ishares MSCI All-World Country index (ACWI) which is shown in ratio form.
This break of an uptrend extending up from early 2021 (nearly 2 years) is a technical negative, and the ratio has violated the 200-day moving average (m.a.) for the first time since early 2021.
Additional underperformance looks likely for US Stocks vs the ACWI index into year-end. Some of this has occurred as the US Dollar has fallen off and experienced weakness for the last two months.
While the Dollar looks close to bouncing, it’s thought that a larger top lie ahead, and should bring the DXY meaningfully lower throughout 2023.
At this time, this underperformance in $SPY is thought to be temporary. However, one cannot make the case for an immediate snapback given this meaningful break and ongoing weakness.
Overall, both Europe and China likely outperform US into year-end before turning lower.
US Dollar decline likely to find support within the next 1-2 weeks
The decline in the US Dollar has played out consistent with cyclical and seasonal expectations, declining over the last seven weeks from mid-October.
Weekly $DXY charts show this pullback to be ongoing but rapidly approaching a meaningful area of support near two prior major peaks in years past. (2016, and 2020)
Given that daily momentum based on RSI has reached oversold levels while weekly RSI is also nearly oversold after having fallen to the lowest levels since 2020, it’s likely that DXY finds support and starts to turn back higher into early 2023.
Elliott wave patterns along with weekly DXY cycles show this recent pullback to likely encounter near-term support in December. Furthermore, DeMark exhaustion will materialize above 1.08 in EURUSD within 2 weeks and above 1.246 in $GBPUSD. USDJPY looks far weaker near-term and might require a decline under 129 before bottoming.
Below is the DXY weekly chart showing this meaningful support for DXY.
Performance data shows defensive outperformance in the near-term
When scanning the major ETF’s on both an Equal-weighted and Cap-weighted basis, we see that most of the last week has proven to be quite defensive
All major S&P Sector SPDR ETF’s were lower in the last week with Utilities having turned in the “least bad” performance, followed closely by Healthcare and Staples.
Energy had a rare down week which showed Energy stocks finally paying attention to the decline to new multi-month lows in WTI Crude. However, as was discussed in last night’s report, I expect this to prove short-lived, and buyable.
Technology to its credit, outperformed five of the 11 sectors on an Equal-weighted basis, and outperformed the Equal-weighted S&P on the week, likely thanks to yields not having turned up sharply. This changed a bit during Thursday/Friday, but Technology still appears like a laggard, as does the NASDAQ. Lifting of Treasury yields post FOMC likely reinforces this view, and should result in additional declines in Technology.
Overall, Healthcare and Staples look like the best sectors for the balance of December. Technology and Energy, while areas to overweight likely in 2023, both are still trying to “find their footing” and we’ll need to see Crude turn higher for Energy to work.