The rally certainly started to show some evidence of “Wear-and-Tear” on Thursday, though no evidence yet again of any meaningful trend reversal. A couple pertinent points: Yields have started to move higher and US 10-Year Yields have broken downtrends since June. This should be a concern to short-term Bulls. Second, Technology finished flat on the day and seems exhausted after reaching overbought levels with NASDAQ negative on the day. Overall, I remain defensive in the near-term and with SPX still under 4250, am expecting a short-term trend reversal starting in the days to come. QQQ as shown below, looks to be stalling right at its eight-month downtrend, and might fail to break out on a weekly close. My own thinking is that markets are beginning a short-term correction which should prove brief and buyable for strength into September. At present, it’s best to keep a close eye on Treasury yields which are moving up.
Treasury yield breakout looks to be the key catalyst
While I’ve discussed this now for a few days’ time, it remains the most important short-term catalyst for a reversal in the stock market.
Yields and stocks have been quite negatively correlated this year, with the breakout back on 1/3/22 coinciding directly with a Stock market breakdown. The yield peak in mid-June also correlated to Stock indices bottoming within a day. The last two months of decline in yields showed nearly perfect but opposite movement with Stock indices which have rallied sharply.
Thursday’s breakout of last week’s highs looks particularly important given the successful breakout of the two-month downtrend as well. Given that Technology rolled over right at this breakout started to gain steam, I find it extraordinarily important technically, and probably the most important catalyst to watch.
3.08% is quite important and surpassing that allows for a minor challenge and move above June highs, which should constitute a chance to favor Treasuries again and expect rates to pullback. At present, this Yield lift is just starting, and could negatively impact Stock indices.
Financials now at Resistance? Expecting Stallout
This group has really kicked into gear lately, with impressive outperformance this past week, which has not gone unnoticed. Insurance, Investment banks, Regional banks and commercial banks have all shown some outsized performance.
This is an important intermediate-term development given Financials percentage within SPX, as this remains one of the highest percentage groups behind healthcare and Technology.
Daily charts of XLF show prices having risen right into this key area of former highs along with former lows from February/March. Technically, it looks right to expect a stalling out in this group. However, weakness over the next couple weeks should present an attractive buying opportunity given how much momentum has improved.
Overall, if one wishes to own Financials, Regional Banks look like the best bet given the breakout in Treasury yields.
Regional Banks should be what to favor in the weeks to come vs. Commercial banks or Investment banks
One particularly important sub-sector trend is the relationship between Regional banks to the broader banking sector, shown below in ratio form as $KRE vs $KBE.
Breakouts of this larger Cup and Handle pattern happened this past Spring as Treasury yields spiked higher, while in the last couple months this ratio has backtracked a bit, precisely as yields have retreated.
This week’s breakout of $TNX above its two-month downtrend should signal that recent underperformance of Regional banks should hold this uptrend line that’s being touched, and start to turn higher.
Overall, I like Regional banks more than the larger Commercial banks over the next 3-5 weeks, which deals specifically with rates starting to push back higher again.
My favorite of the Regional Banks are $FHN, $ABCB, $RF, $MTB, $BANF, $FCNCA, $TBBK to name a few. I’ll discuss these more in the weeks to come.