The upside follow-through for Equities is nearing initial time and price targets, which likely result in a stalling out/reversal as of Wednesday of this week. Reasons for an upcoming change of trend have more to do with cycles than “overbought conditions” per se, but intra-day momentum gauges have certainly reached levels which makes this move seem stretched after 200 $SPX points gained in four days’ time. Utilities, Discretionary and Financials continue to be sectors to overweight, while Technology on an equal-weighted basis has shown far less strength lately than big-cap weighted $XLK. Importantly, while $SPX has broken its one-month downtrend and has rallied on above-average breadth over the last few days, Equities are nearing a key period this week which has produced changes of trend over the last five of six months into mid-month. Thus, further rallies post Tuesday’s CPI report should constitute a time to consider hedging/selling for those who tend to be more short-term focused. Others which have a lengthier buy and hold mantra should postpone initiating new long Equity orders this week, but would be encouraged to consider buying on any weakness into early October.
US Dollar likely to turn back to highs as weakness looks nearly complete
While the idea of a falling US Dollar makes sense between October and year-end, it looks premature to see recent $DXY weakness extend too meaningfully just yet.
Charts of $EURUSD are shown below, and similar to Pound Sterling, prices have reached levels where a trend reversal is likely. Pullbacks down to new lows might be revisited again in October, however at present, both Euro and Sterling have both advanced to short-term downtrend resistance, and $DXY looks close to bottoming.
Ideally this pattern will take the shape of an initial $EURUSD decline and expect that $DXY should be able to push back over recent August highs to resistance targets near $112.
Once $DXY reaches $112, there will be sufficient overbought conditions (in all likelihood) to suggest selling $DXY and buying $EURUSD. Bottom line, I argued last week technically that US Dollar would begin to turn lower. That was a tactical call only and now I expect some stabilization and a push back to new monthly highs. Finally, this might also prove short-term as longer-term cycles trend down into year-end which might provide some fuel for Equities to extend higher again. As shown below, $EURUSD prices are up against meaningful downtrends, making this bounce difficult to trust.
$TNX looks to be breaking out and kicking off its final push higher for 2022
Monday’s minor breakout above highs of the last four trading sessions looks likely to extend back to test and briefly exceed June 2022’s highs in yields.
I expect upside targets likely materialize at 3.50-3.70% toward the back half of September/early October before reversing back lower.
Reasons for thinking Treasury yields peak have to do with cycles, near-term overbought conditions, sentiment, and DeMark exhaustion. On this last point, weekly DeMark signals could be in place as early as four weeks’ time. Meanwhile, cycles turn lower into next year for US 10-Year Yields, and it’s expected that rates will turn down sharply from October into year end.
Finally, given the persistent positive correlation between Equities and Treasuries (Negative for yields and Equities), a sharp push higher to test/exceed highs likely is considered a technical catalyst for a trend reversal back lower in Equities. Similarly, if Equities bottom out in early October, one would expect that yields also should be close to peaking out and trending lower.
Overall, $TBT and/or $TMV look attractive over the next 3-5 weeks, and then this likely reverses as October gets underway. Any push back to new yield highs into October should translate into attractive opportunities to move out on the yield curve, adding duration and expecting yields to correct sharply. In early October, $TLT and $TMF should be attractive to buy.
Utilities breaking back out to new highs for 2022 likely continues a bit longer and continued overweight
The flight to defensive trading continues and Utilities is the only one of the 11 major Sectors which has moved back to new all-time high territory. (Both $XLU and $RYU).
While Utilities lagged over the last rolling five-day period, it has outperformed all other groups besides Energy on a one-month and YTD basis while being the 2nd best sector behind Consumer Discretionary on a three-month basis.
Its push back to new highs looks like the final move of a 5-wave Elliott-wave pattern from June lows. Monday’s breakout should help $XLU reach 80.50-81, but likely could prove to be a selling opportunity over the next few weeks on further strength.
As relative charts to $SPX show below (bottom portion of graph) Utilities outperformance gave an early warning for Equity market weakness last December 2021, with relative breakouts vs $SPX about one month ahead of the $SPX peak in January. The flattening out in poor relative performance from 2020 into mid-2021 also was a key development in starting to trade less poorly during the middle part of 2021. (See the flattening out in this downtrend shown from May-November of last year, breaking the first downtrend in relative performance for $RYU, the Equal-weighted Utilities ETF from Invesco).
The key takeaway here: while both absolute and relative charts remain trending higher, it’s always worthwhile to study relative charts of Defensive sectors closely for early signs of Out/Underperformance which normally shows up in charts before major $SPX turns.