Increasingly it’s looking like Wednesday’s abrupt reversal could lead to a greater amount of volatility in the short run ahead of November’s all-important CPI report and mid-term elections. While rates seem to be close to peaking out, which would coincide with Equities bottoming, uptrends were broken from mid-October, and Technology is turning down more quickly than is comfortable. The real question is whether Equity markets start to respect the 10- or 20-year cycle more than the 60-year. This could allow for weakness into mid-month, which has been a predictable cycle for SPX with mid-month turns having happened over the last six months (See Circles below). Overall, near-term lows could materialize Friday between 3650-3700. However, bounces that barely recoup 3800 and then violate 3650 would result in new lows for 2022, which cannot be ruled out now given Technology weakness. Bottom line, it’s important for yields to reverse quickly given the degree of negative correlation with equities.
Technology is nearing Make-or-Break levels
While sentiment, seasonality and cycles typically are quite positive during this time of year, it’s important to take note that Technology has turned down abnormally hard in recent days.
I pointed out last week that the large-Cap Tech “FANG”-based Composite had broken down to new yearly lows vs the SPX, making this area particularly unattractive.
Yet, it’s the price action in the Equal-weighted Tech space that’s now reason for concern. As shown below, if prices break the red line serving as support in the relative relationship of Equal-weighted Technology vs SPX ($RYT vs SPX), than markets could be in for some above-average volatility sooner than later as Technology finally undergoes capitulation.
This would bring about a market low sooner than later, but yet in the short run, would allow for above-average volatility.
Bottom line, it’s imperative that Treasury yields start to turn back lower immediately, as this recent back-up in yields has been particularly hurtful to Tech. At present, Tech is not a group to favor in the very short run until/unless some evidence of strength starts to unfold as rates roll over. Most of the near-term strength has occurred in Energy, Industrials and Healthcare and that likely doesn’t change right away. These sectors are all favored over Technology for November until markets show either greater stabilization in this group, or it faces capitulation at new lows. (which from a counter-trend standpoint, should bring in a meaningful market low, allowing for a healthy bounce into year-end).
Within Healthcare, Biotech still looks to be attractive
I’ve discussed Healthcare quite a bit lately, but feel it’s important to make a deeper dive in the sub-sector relationships to have a better handle on where the relative strength is occurring.
Overall, Biotech seems to be sniffing out that long-term rates might be close to peaking, as this sub-sector has held up much better than expected in recent months.
Relative charts of both Biotech, and also Pharmaceuticals, vs Medical Devices and Healthcare Services both show Biotech and Pharma to be considerably stronger.
Furthermore, since May of this year, Pharmaceutical stocks have been falling relatively speaking to Biotech as shown in the weekly chart below of $PPH vs $IBB. This week’s breakdown could put more pressure on the relative performance of Pharma vs Biotech. This means that among Healthcare names, Biotech still looks to be quite strong and should outperform Pharma in the weeks/months to come.
Note that weekly charts show DeMark indicators on this ratio successfully pinpointed lows in $PPH vs $IBB back in late 2020 right before the low and then successfully showed Upside exhaustion signals (13 Countdown signals based on TD Combo and TD Sequential) right near the peaks in May 2022.
Until/unless some evidence of exhaustion appears in this relative ratio, it’s expected that Biotech likely leads the charge into year-end within Healthcare.
Mass Pressure Index shows weakness into mid-month
I discussed last week that the 60-year cycle had been a fairly big influence on 2022, as 1962 showed a pronounced low back in June and also a retest in October before turning sharply higher through the balance of that year.
This year, however, the rally off the lows seems to have begun to falter, and it’s important to recognize that the 10- and 20-year cycle might also have some influence.
Both of these latter times, in 2012 and 2002, showed weakness into mid-month before bottoming and turning higher.
As Gann’s Mass Pressure index shows, the rally into early November on this composite abruptly ends and turns lower into mid-month. While I’m not counting out the 60-year cycle yet as having some influence (Until/unless SPX breaks 3650), it’s important to note that this larger composite does trend down over the first couple weeks of November before bottoming out.
Overall, the back half of November should turn out to be better than the front half and my view is this recent downside volatility might play out between now and November options expiration, before a push back higher into December. Key time zones for possible trend change in November lie at 11/10 and then 11/15 which could mark a low if/when indices are falling into this period.
