Thursday failed to bring much relief, as SPX, DJIA and NASDAQ all closed at the lowest prices in more than a month. US 10-year Treasury yields barely missed hitting new highs for the year, while Gold sold off to the lowest levels in more than two years. Crude oil and Cryptocurrencies look to be rolling over as well and likely trade down into early October. Overall, this remains the most difficult seasonal time of the year, and not much, if anything is working right now, outside of Cash and the US Dollar pushing higher. It’s my thought that the next three weeks will prove difficult for risk assets in general, and it looks early to attempt to buy dips for anything more than a 1-2 day bounce. Pullbacks down under 3700 look probable into early October, and QQQ very well could retest June lows. However, the combination of bullish cyclical forces turning higher starting next month, along with bearish sentiment likely reaching more capitulatory levels, likely helps to put in a low in October, at a time when no one expects it. Yields turning lower are a key part of this argument, and likely hit strong resistance and turn lower within four weeks. Bottom line, the notorious “Bear-Killer” month and a seasonally positive time are directly ahead and should mean that near-term weakness stabilizes by early to mid-October and starts to trend higher. At present, “Cash is King” until October.
Gold has hit the lowest levels in more than two years
As the US Dollar and yields continue to press higher, precious metals have begun to turn down sharply, directly coinciding with Real Yields rallying.
Gold broke July lows on Thursday, finishing at the lowest levels since mid-2020. While September is notorious for higher Metals prices, this trade has been derailed given the persistent move higher in both Treasury yields and the US Dollar.
Fortunately for the Bulls, sentiment is beginning to get quite bearish on Gold, and CFTC data shows commercial hedgers getting longer and longer, while Large Speculators are negative. While trends and momentum are clearly quite negative, this latest wave lower likely fails to break meaningfully below a support zone found at 1550-1600 in the short run.
Cycles turn bullish into end of year from October, and seasonality can still allow for gains in the form of a tactical bounce which likely begins as Treasury yields begin to peak out next month.
Overall, while Thursday’s close was quite negative, and Silver has begun to outperform lately, (failing to follow Gold to new yearly lows) it still looks about 3 weeks early to buy dips. One should hold off on pressing longs currently, but I do recommend buying dips into October.
WTI and Brent Crude look to be rolling over, and likely trend down along with Equities into October before bottoming
Crude oil looks to be turning back lower after just a lackluster bounce. WTI Crude is expected to retest and break recent lows which could allow for this to test $79, or potentially move a bit lower down to $75 before stabilizing and moving higher.
Energy stocks, to their credit, have held up much better than WTI Crude, but look to be slowly turning lower. Alternative Energy looks even more appealing than Fossil fuel related Energy and has proven resilient in recent weeks.
Overall, I favor holding off on getting too aggressive in buying dips until October for either Crude or Energy stocks in general but feel that Energy likely bottoms in October and turns up into year-end. Bottom line, it’s expected technically Energy should be still overweighted vs the broader market for 2022, but that short-term declines could happen over the next 3-4 weeks. This necessitates being a bit more selective, and $XLE is preferred over either $XOP or $OIH at present given the recent uptick in market volatility.
Discretionary still trending higher vs Staples
Interestingly enough, despite the $SPX, $QQQ and $DJIA finishing at the lowest levels in over a month, Discretionary outpaced Staples yet again.
Some of this was due to the strength in Casinos and Cruise-liners, and both of these groups have trended sharply higher without missing much of a beat in recent weeks.
Ratio charts of $XLY vs $XLP broke out two months ago from a lengthy intermediate-term downtrend, which bodes well for Discretionary to trend higher and outperform vs. Staples in the months to come.
Given $NFLX, $LVS, $RCL, $CCL, $WYNN, $NCLH all trading higher by more than +2.50% on a day that Equity indices fell sharply by more than 1%; this merits watching closely.
In my view, if markets can hold up relatively better when viewing Equal-weighted SPX as groups like Financials, Discretionary and Healthcare are outperforming despite Technology dropping (and hence SPX, QQQ selling off more sharply), this could drive a market low at a time which few expect it.
The real key involves watching volume and Advance/Decline indices carefully as October gets underway, along with seeing whether there are meaningful divergences in stocks hitting new lows vs back in June/July timeframe. My guess is that markets will hold up better and provide a buying opportunity next month. Stay tuned.
Chart of $XLY vs $XLP in ratio form, shown below.