Key Takeaways
- Trends & momentum remain negative short-term for US Equity indices and SPX requires a move back over 4465 to expect this weakness is complete
- Treasury yield breakout looks to extend, and should be bullish for Financials, yet might weigh on Technology near-term (Growth might underperform into October)
- US Dollar index’s breakout to new highs for 2021 can allow for underperformance in EM, commodities into October
Breakdown in SPX makes it a bit early to expect an immediate snapback without more proof heading into October. 4300 is key as support while 4465 resistance:
Ongoing Short-term Concerns:
- Traditional technical momentum indicators like MACD are negatively sloped on daily while RSI is not oversold
- Uptrend from March lows have been violated by SPX, and broader-based IWV.
- Inter-market negative momentum divergence present on several different time frames
- Broader-based gauges like Value Line Geometric or NY Composite peaked out in Spring and never followed SPX, NDX to new highs in August
- Half of SPX major Sectors peaked out this past Spring, while Technology has camouflaged this market rally given “FANG” dominance
- Market cycles suggest weakness could persist into October before rally back to highs
- Junk bond Spreads have widened out since July and have not tightened to new lows with push to new highs of equity indices into August
- Leading sectors like Transports, Semiconductors have lagged in recent months
- Treasury yield rally (which looks to continue, has served to deflate Growth/Tech
As seen below, Growth has begun to turn lower vs. Value after Treasury breakdown (yield rally) has led to Technology weakness near-term, while Financials, Energy remain strong. Given a four-month trendline violation, this looks likely to last into October:
What’s promising:
- Financials outperformance has been bolstered given Yield rally (Important as this is the 3rd largest sector within SPX)
- Bearish sentiment persists- Huge uncertainty about Debt ceiling/Peak growth/Fed rate hike schedule having been moved up causing concern
- Defensives underperforming during a drawdown is unusual and likely means this first pullback from September highs likely will prove short-lived
- Relative calmness in Junk bond spreads- While these did widen out after July, they also tightened back and have not been widening out in a way that causes concern
- DeMark counter-trend exhaustion largely is not in place on weekly charts of most indices
- Recent market volatility hasn’t resulted in more than 5% decline off all-time highs
- Elliott-wave structure argues that a push back to highs in Q4 is likely
- Technology remains trending higher, despite the recent underperformance
Technology has flattened out in its relationship to SPX, as shown by ratio charts of Invesco’s Equal-weighted Technology ETF (RYT) vs Equal-weighted SPX (RSP), yet until this multi-year uptrend is violated, Tech lagging into October remains buyable:
