The recent rollercoaster has been nearly 100% rate driven, as early pullbacks Tuesday on rumors of China forming a coalition to study how to exit their Covid-0 policy coincided with a sharp pullback in Treasury yields. Whether or not this can ever be trusted to be correct is dubious as we’ve seen a number of false starts lately. However, better than expected Economic data resulted in rates backing up, and Equities responded negatively. Overall, this bounce in Rates should be nearing its end, and 4.15-4.20 likely results in resistance for TNX, while 3800-3820 holds on SPX pullbacks, right near its existing uptrend before turning back higher into mid-month near Election time. Overall, I expect that recent Equity weakness proves short-lived, but this should directly coincide with an upcoming rolling over in Treasury yields. Thus, while not an economist by trade, I suspect that either some dovishness in Fed speak happens, or other news that causes rates to turn back lower is fast approaching, and Equities rally on that development.
Financials look very close to breaking out
While Financials turned up relative to S&P 500 back in August, they’re now facing their first major test on this rally. This looks particularly important given that this group lies just behind Healthcare as one of the largest members of SPX by market capitalization, currently 3rd.
Breaking this static trendline connecting former peaks in Invesco’s Equal-weighted Financials ETF, $RYF, would be quite positive for Financials, and likely a tailwind for a further push higher for Stock indices into mid-month.
Bottom line, watching $58 on RYF and $35 on $XLF for evidence of being exceeded look quite important in the days ahead. I expect that this group is poised for a minor breakout, and this should aid Financials into mid-November.
Technology also looks to be nearing key resistance and getting above this downtrend helps to jumpstart further gains
While Technology has rallied in recent weeks, it has not yet made the kind of breakout relative to SPX as has been seen by Healthcare. That’s important for this sector and would help create a nice tailwind for additional gains.
It’s thought that Rates turning down should be the key catalyst here, and movement down under 3.90% in TNX would represent a breakout of its multi-month uptrend. (2-year and 30-Year yields are not yet in this same position, but also should be watched carefully)
Bottom line, as this bottom section of the chart below illustrates, breaking relative downtrends vs the SPX should be quite positive for Technology to strengthen further during a very important part of the year when Bullish mid-term election year seasonality normally dominates.
(The top part of the chart is Invesco’s Equal-weighted Technology ETF, $RYT shown on an absolute basis) (The Bottom part of this chart is a ratio chart of $RYT vs $SPX, illustrating relative strength of this sector vs the market))
Energy still looks quite strong, but might stall out based on Mean reversion factors in late November
Interestingly enough, despite WTI Crude having straddled recent lows, and not really emerged back to the $90’s for more than a few days before pulling back, the performance in fossil fuel Energy names has been stellar.
Energy remains the best performing ETF of the major SPDR S&P ETF’s and also Equal-weighted ETF’s on a 1, 3, 6, and 12 month basis. Year-to-date performance in both $XLE and also the Equal-weighted $RYE are above 60% for 2022, and showing little to no real signs of stalling out. As might be expected, signs of weakness take some time before they begin to have a meaningful drag on sector performance and even a decline from $130 down to the mid-$70’s in WTI Crude had little meaningful long-lasting change for Energy outperformance.
Bottom line, most of the counter-trend indicators I employ along with traditional seasonality studies should start to favor an eventual stalling out in Energy, which likely will begin no sooner than 3-4 weeks from now, and could negatively impact this sector for a couple months, before outperformance continues in 2023.
One should keep in mind that $XLE, $XOP, and $OIH all are nearing former Spring 2022 highs, and these levels likely could result in a stalling out for this sector in the short run. Charts below show the ratio charts of Equal-weighted $RYE, Invesco’s Energy ETF, compared to the Equal-weighted S&P 500.
Technicals suggest a further escalation higher in November, and time-wise, DeMark tools suggest outperformance could last another three to four weeks at a minimum. However, to show these signals, this would necessitate this recent strength continuing.
Overall, Energy remains my top pick for November, and has been one of the four sectors I expected to outperform in 2022. However, if/when counter-trend exhaustion signals start to appear on absolute as well as relative charts of Energy vs SPX, then I expect we will see a stalling out, and likely underperformance in this sector on a very short-term basis. Given that WTI Crude does not seem to technically show any evidence of breaking $70 and should start to turn back higher into 2023, it’s difficult to be underweight and/or avoid Energy.
Those who are expecting mean reversion out of this year’s best performing group into the worst might have a brief window of time spanning two-months where this might work. However, it looks right to stick with Energy as an outperforming group and expect further absolute and relative strength in November. If/when cautionary signals arise into late November, I’ll discuss at that time. For now, Energy is to be overweighted.