The selling continues directly following the advance in Treasury yields, and US major benchmark indices have all fallen now to within striking distance of June lows. My thinking is that there’s a good likelihood of a retest of lows in QQQ, while SPX gets close, before rebounds happen starting the first week of October. When viewing QQQ below, a few relevant points to make technically: First, DeMark exhaustion signals on daily charts likely could be triggered as early as next week. Second, timing on weekly TNX remains two weeks away from any peak and it’s likely necessary that these are in place before trying to buy dips. Third, cycle composites pinpoint 10/4-6 as likely providing an attractive turning point and would match the timing for a TNX turn. Fourth, sentiment is certainly growing close to extreme bearishness in AAII data, but arguably still not much capitulatory evidence in Equity markets despite Thursday’s abnormally high downside volume reading. Overall, markets are growing closer to a low and the risk/reward for shorts is growing sub-par heading into late September. Yet it remains prudent to await more evidence of price and time aligning which likely means buying dips is a couple weeks early.
Record Pessimism towards Europe- How long can this last?
Investors have shown nearly record Underweight positioning towards Europe in wake of the recent Energy crisis given the ongoing Russian/Ukraine war.
Performance has warranted this Underweight level of positioning, but sentiment rarely shows pronounced “record low” level of bearishness lasting too long.
Given that Europe has managed to stockpile Gas inventories to over 85% ahead of the 2022-2023 Winter, this might be something that many have overlooked when being too bearish on Europe. Natural Gas prices have certainly tanked after the announcement of Russia cutting off supplies recently in the last month, not jumped higher as might have been expected.
Technically, the EuroSTOXX 50 does look to be on the verge of breaking down, and prices are hovering near multi-month lows near the bottom of a giant consolidation. Violating support likely causes further weakness which would bring this Underweight positioning reading to an even lower level.
Overall, while US remains a big overweight to Europe and the rest of the world, I think it’s wise to watch for any evidence of this changing in the months ahead. At present, favoring domestic Equity outperformance vs. International still makes more sense given the relative strength.
EuroSTOXX 50 on the verge of a big breakdown
In the last few weeks, rallies have gotten weaker and weaker for EuroSTOXX 50 index (EU50) as prices have neared the apex of its recently created Triangle pattern.
As shown on daily charts below, the rally into August peaks which was seen also in US Stock indices failed to make much progress in alleviating the recent downtrend. While US stocks experienced a healthy rally off the lows, Europe’s bounce barely made any real retracement, and EU50 continues to trade within a very strong downtrend.
Bottom line, traditional technical analysis would have us believe that triangle patterns following lengthy declines normally are resolved in the direction of the original move, which in this case, translates into a downside breakdown.
However, given that US stock indices are growing close to reversing higher, one has to watch for the possibility of a false breakdown. September lows look to be broken as of this week’s weekly close. Yet, 3350 is important, and it’s likely this holds on pullbacks and should provide some stabilization. Overall, Europe remains far weaker than US, and EU50 looks to be nearing the “moment of truth.”
US vs Europe relatively speaking continues to suggest favoring US stocks
Not surprisingly, we see that US vs Europe has been trending higher for years. (Ratio charts shown of SPY vs EuroSTOXX 50) The steeper part of this outperformance has occurred in recent weeks, and might be temporarily reversing course in the short run (as seen by this minor trendline break of the uptrend shown by the green trendline) However, any weakening in US vs Europe would strengthen the case for having overweights in US vs Europe, provided this larger red trend does not get violated.
In the months ahead, given a good likelihood of the Euro and Pound Sterling starting to rally vs the US Dollar along with very bearish Underweight readings for Europe, I suspect this US outperformance might eventually be reversed as mean reversion gets underway. However, in the short run, it remains right to favor US vs Europe on any weakness into October, and particularly given the probable breakdown of the EU50, Europe still looks to be a laggard for the months to come. Stay tuned.
