The near-term downtrend remains intact for US benchmark indices after early strength was repelled yet again at the key 4100 level. Given that both 10 and 30-year Yields have shown evidence of starting to turn higher (and US Dollar rally looks imminent) it makes pressing long bets here still difficult given a plethora of upside resistance. Overall, SPX and QQQ look to be at important levels where a stalling out and trend reversal is very possible given the lack of Technology follow-through and ongoing Defensive trading. Bottom line, exceeding 4100 on a weekly close is the first step for Bulls, but getting over 4225 would add substantial credibility as to the viability of our October 2022 bottom being a more important low. Failing here post FOMC in stock prices as yields turn higher would suggest a possible “backing and filling” into late next week. It remains important to keep a close eye on $DXY, $TNX, and Technology
2-Year Breakdown likely could lead to 4.00% while TNX starts to stabilize and rally
One direct consequence of Tuesday’s weaker than expected inflation figures concerned the drop in US 2-Year Yields.
2-Year yields closed at the lowest levels in months, and the technical close keeps near-term trends bearish after the recent violation of its Head and Shoulders pattern.
While it might be unusual to see 2-year yields fall under Fed Funds rates by any meaningful amount, it remains correct technically to bet on a decline to 4.00% at a time when long-term yields have begun to stabilize and rally.
Overall, I’m betting on some mild steepening in the yield curve led by the front-end of the curve, expecting the (10’s-2’s) spread to rise to -60 bps., up from its current -72.7 bps. The curve is starting to look a bit too flat given the rapid fall in inflation, but increasingly, $TNX looks to be trying to bottom out and likely pushes higher post FOMC.
2’s/10’s starting to steepen out (10-Year yield – 2-Year yield)
The daily Bloomberg chart shows a mild breakout in the 2’s/10’s curve, and I expect that likely continues in the days/weeks to come. The rapid rolling over in the 2-year yield could find support near 4.00% and likely does not materially weaken too dramatically under Fed Funds.
Overall, some stabilization in the long end of the curve looks likely after having flattened out a bit too aggressively, and now monthly Core inflation is starting to recede. Overall, a move from -72 bps to -60 bps looks likely in the short run.
Technology still not strong enough to suggest upside Follow-through
The most important piece of the puzzle for US equity markets remains Technology performance, or in our case, lack thereof over the last one and three-month period.
Despite a nice 3% bounce in Technology over the rolling 5-day period, defensive groups like Utilities are still outperforming “Tech” by over 500 bps in the rolling 1 month period. That doesn’t give much confidence of an impending breakout in Equity markets.
The chart below highlights equal-weighted Technology vs Equal-weighted S&P 500 in ratio form.
Until/unless Tech can recover and begin to trend higher relatively vs the S&P in equal-weighted form, it remains difficult to bet on a big year-end rally, particularly as long rates look to be trying to bottom out.
I’ll hold off on getting too aggressive about overweighting Technology in the short run barring proof of this sector starting to show better performance. At present, longs in Industrials and Healthcare make the most sense, looking to buy dips in Energy and also Technology in the weeks to come on any further weakness.