This roller coaster of a week has taught us some valuable lessons, and it’s important to watch market breadth carefully during this stage of the decline along with what sectors are faring well, vs. which ones are still weakening. Overall, the early week strength seen on Monday/Tuesday with outsized breadth still looks quite important and positive. Moreover, the Thursday/Friday pullback really doesn’t take away from the benefits of what occurred earlier in the week, as it’s occurring on much lower negative breadth than the early week breadth surge. Additionally, wave structure seems to suggest this move down is occurring in three waves, and my own analysis suggests SPX-3584 should not be taken out right away. Rather, a bounce back higher should occur over the next 1-2 weeks. Energy continues to work quite well, while Aerospace & Defense names are also holding up. Bottom line, the risk/reward is growing more positive in my view given that the downside risk looks very well defined at this past Monday 10/3 lows. Unless $SPX 3584 is taken out, it’s right to buy this dip, expecting a push up into/post next week’s CPI.
Mid-caps are quietly breaking back out vs. Large-caps
Interestingly enough, the ratio charts of Mid-Cap Growth to Value show Growth to be breaking back out vs Value which is fascinating given the continued fascination on large-cap Growth.
Small caps have strengthened relatively vs QQQ, while Midcap Growth ETF (Ishares Mid-Cap Growth $IJK), has strengthened sufficiently vs. Midcap Value ETF (Ishares Mid-cap Value-$IJJ) to exceed a downtrend extending down from late 2020.
While this has some work to do in order to regain the larger uptrend extending higher over the last few years, this looks to be a welcome development. Overall, both Small caps and Mid-caps have been showing some impressive relative strength lately.
Solar Energy stock underperformance could be nearing an end as TAN looks close to bottoming out vs. XLE
Since mid-August, Clean Energy stocks have underperformed fossil-fuel Energy names substantially with ETF’s like $ICLN and $TAN pulling back sharply.
Given that WTI Crude oil doesn’t yet look to have bottomed, recent strength very well could reverse course in the next 1-2 weeks which would be thought to be a larger negative for Fossil fuel names.
Meanwhile, weekly ratio charts of $TAN vs. $XLE show Solar energy to be weakening this past week following a strong period of outsized strength which led Solar stocks to make minor breakouts vs XLE.
Overall, while many of the Alternative energy names were quite weak this past week and underperformed $XLE, I don’t think it’s right to avoid them. Furthermore, Alternative energy looks close to bottoming given traditional trend analysis coupled with DeMark indicator overlays. Bottom line, I expect $XLE, $OIH, $XOP to likely stall out into next week given the degree of short-term strength up to near September peaks. Meanwhile the technical deterioration in Solar Energy ETF $TAN looks overdone. It looks right to consider buying into Solar Energy and expecting this underperformance should stabilize, and allow this group to turn back higher again.
Both SolarEdge Technologies $SEDG and Enphase Energy $ENPH look interesting technically.
Treasury yields look closer than ever to peaking
TNX weekly charts with DeMark overlays show some very important confluence happening this week on this rally in Treasury yields back higher.
Daily, weekly and monthly charts show the presence of counter-trend exhaustion signals based upon the counter-trend indicators of Tom DeMark, TD Sequential and TD Combo.
These were missing last week on $TNX, but were already present on $TYX. These same signals happened at the June peaks that coincided with yields rolling over, and subsequently helping US Stock indices to rally sharply.
Bottom line, it’s likely that upside proves minimal for yields in the weeks to come. Treasury yields are close to peaking out and could happen as early as next week. One should watch carefully to see if these Demark-based signals are confirmed, (which on a weekly basis requires one weekly close under the close from four weeks ago) a reversal in yields looks quite close.
ICYMI: Check out Mark’s new stock list “Upticks” here