The near-term pattern failed to show much deterioration, despite the uber-hawkishness of Powell’s comments Tuesday. While SPX did pullback sharply, this was a “drop in the bucket” compared to the rally which had carried SPX 150 points higher since Thursday’s lows.
Erasing half of this prior bounce is insufficient to think trends are turning bearish. However, sentiment is clearly turning more and more negative, in my view. Investors seem to be hyper focused on the economy more than ever, despite the futility of being able to successfully use this data to forecast price action.
Rates showed some meaningful evidence of stalling out despite Powell’s commentary having been called quite hawkish. Momentum has begun to wane on long-term Treasury yields and yields are 10-12bps lower than last week, despite Treasury sentiment having worsened. I expect rates to peak out next week and begin turning back lower.
Defensive groups like Utilities and REITS were down more than Technology on Tuesday. While all 11 sectors were negative on the day, and volume failed to come in strongly negative enough to suggest an immediate bottom, I feel this happens into next week.
Specifically with regards to price action, the chart below highlights how the 150 point SPX rally from 3925 to 4080 fell sharply today. Yet, prices have not pulled back to undercut last week’s lows. This area at 3925-8 for S&P Cash index and Futures looks to be important.
Furthermore, evidence of yields starting to tire after this rally up, likely results in 10-Year Treasury yields failing to move back over 4.25%. Overall, I like buying dips in SPX barring a decline back under 3928.
Bearish sentiment polls like AAII will certainly continue to turn more bearish on near-term Equity price weakness. Elliott wave projections show a very clean five-wave advance from late last week, and Tuesday’s selloff failed to erase the bullishness of last week’s progress nearly to the extent that many investors who watched Powell suspected would happen.
Finally, this pervasive bearishness is starting to build again. The 10-day moving average of the Equity Put/call ratio is now at 0.75, nearly the highest levels since January.
Overall, I like buying dips, and one of my favorite cycles bottoms on March 15th, which lined up directly with October 13th 2022 lows. This has nothing to do with the 80-day trading day cycle, but happens to show a turn on the same day. I’m pretty confident that markets will not extend any selloff past 3/15 of next week, so technically it looks right to expect some support, and for equities to rally.
Treasury yields start to falter, despite hawkish rhetoric
Probably the most important piece of the puzzle for Tuesday came with the stalling out in yields after Powell’s testimony.
Sentiment seemed to grow more negative on Treasuries based on commentary on leading TV networks, and most seemed uniformly convinced that yields would have to move higher. As shown last week, the CFTC non-commercial Treasury futures positioning has reached the shortest positioning since 2018. Thus, “large investors” (hedge funds) appear to be betting on higher long-term rates with the most conviction in nearly four years.
Daily Bloomberg charts of TNX show this crack in the uptrend of US 10-year Treasury yields to break this recent uptrend. Momentum has begun to wane, per MACD nearly crossing over the signal line to negative.
Overall, I suspect this could play out very similar to late October, when the first pullback consolidated back higher before a larger breakdown in yields.
Cycle composites show March 15 to late April as being a time of falling Treasury yields, which would go against the broader consensus. Movement back under 3.84% in TNX would suggest this is underway.
March seasonality in pre-election years tends to bottom mid-month
A few weeks ago I shared how both March and April tended to be much stronger than most non-pre-election years.
Interestingly enough, the normal intra-month trends tend to be choppy in March during pre-election years from the beginning of the month until around the 10th trading day, before turning sharply higher.
This directly lines up with next week and the March 14-16th timeframe, which a month ago was thought to represent a possible cyclical low. Recent selling makes it far more probable that this is a low for stocks and Treasuries.
Overall, I don’t expect that any selloff in either stocks or bonds extends past Wednesday of next week. Any further selling pressure should hit support, which for SPX lies at 3925-8, and provide an above-average rally back to test and exceed February highs.
Precious Metals decline should be nearing its final stages
As might have been expected with the rapid runup in both the US Dollar and Treasury yields, precious metals have turned back down sharply in recent weeks.
However, this decline now looks to be nearing meaningful support into next week, which I believe should coincide with precious and base metals bottoming.
The Dollar looks very close to resistance. Furthermore, the TNX likely begins its decline cyclically next week. Thus, one should look at utilizing recent weakness in precious metals to buy dips, expecting a bottom to materialize.
Next week would help many DeMark related exhaustion counts materialize, potentially within the next 3-5 trading days.
Overall, metals look attractive to me to buy dips next week. At present, this looks a bit early from a timing perspective, but Gold would be attractive under 1800, I believe, and Silver likely should find some footing near the $19 level.