The recent rollercoaster in Equity prices looks to be a negative given all the uncertainty in early November ahead of this week’s CPI. I had argued that prices might start to stall out and turn back lower, and I don’t think Tuesday’s minor bounce relieves fears of that happening. Four key negatives are still in place: First, Technology remains quite weak and has not sufficiently stabilized. Second, implied volatility looks quite cheap compared to the recent Cross-asset volatility. Third, Treasury yields remain stubbornly high and have not yet rolled over. Fourth, short-term cycles show a minor peak in place this week and possible weakness into 11/22. Overall, until SPX 3912 is exceeded, my thinking is that there stands a better chance of SPX pulling back in the weeks ahead. 3700 is a very important spot and breaks of that would lead down to challenge and undercut October lows. Thus, strength is required immediately.
Two Key scenarios to consider over the next week
1. Equities start to turn down by end of week with possible catalysts of a contentious election without an immediate clear result, or a possible failure of CPI to retract immediately. This would go hand in hand with recent breakdowns in short-term trends and momentum. Cycles point down into 11/22, so this might allow for SPX to immediately move to 3700 and any close under that opens things up for a test and break of 3500. In this case, Technology undergoes a capitulation over the next few weeks before bottoming, but ultimately bottoms this year before turning higher.
Alternatively, markets churn until next Tuesday but show limited upside and turn roll over. 11/15 would line up with mid-month turns of the past six months.
2. Equities turn higher sharply by end of week back over SPX 3912, the area near 10/28/22’s high close for this most recent upswing. If CPI shows a meaningful decline which results in US Treasury yields rolling over sharply, this could help Technology stabilize and try to bounce more sharply than it has in the last week. This would project SPX higher towards moving to 4100-4150, which for now is not the base case scenario anymore given last week’s technical negatives.
At this point, given a lack of meaningful Technology strength and prices just under meaningful downtrend line resistance, it’s difficult expecting #2 to materialize particularly as Crypto currencies have begun to sell off sharply while short-term cycles suggest a peak this week. However, I’ll certainly respect this if it does happen. This in turn would give weight towards the 60-year cycle being on course, which has shown some signs of potentially diverting and more closely following the 10 or 20-year cycle in the last week.
Performance data above highlights the outstanding strength Industrials and Materials and Energy. These three equal-weighted sectors have managed to gain nearly 10% in the last month and are outperforming SPX sharply. While I expect Energy outperformance to likely continue into December, any reversal back higher in $DXY might adversely affect Industrials and/or Materials.
Industrials surging to multi-year highs vs SPX warrants attention
Equal-weighted relative charts of Industrials vs SPX shows a breakout to the highest levels in more than five years, as $BA, $GE, $CAT, $JCI, $UAL, $HON, $LMT and $XYL have all gained more than 20% in the rolling 1-month period.
This relative breakout is impressive for Industrials and despite this representing a small part of SPX, this move looks to be something which could help generate intermediate-term outperformance. I like Industrials to likely require some consolidation before this strength can start to overtake this year’s outperforming sectors. However, the weak seasonality in the US Dollar index in December might bring about further relative strength in this group.
Finally, Industrials should outperform in 2023 if this breakout vs. SPX can hold into year-end. Sectors making multi-year breakouts typically give a loud and clear warning for upcoming outperformance and this certainly looks interesting at a time when the broader market remains quite weak.
US Dollar index nearing support
The last six weeks of choppy consolidation in the US Dollar index looks to be nearing support. This coincided quite positively with the recent uptick in the Precious Metals and many commodities, but now these areas might require some consolidation as DXY turns back higher.
Ultimately, bounces up to the higher area of trendline resistance might still prove to be selling opportunities into late November/early December. Seasonality shows the US Dollar typically underperforming substantially in the month of December which historically has been its worst performing month over the last 30 years.
Overall, the bounce in precious metals and also Copper likely could find strong resistance this week and might begin to backtrack if/when DXY and TNX both start to turn back higher. Bottom line, more is needed to suggest a larger peakout in the US Dollar is taking place. My cycle composites show next year to have a better chance for a larger reversal from bull market to bear market. Thus, for now, downside should prove limited. However, I also don’t expect too much upside into December, and gains should constitute a chance to sell US Dollars and/or consider buying $EURUSD or $GBPUSD.