Day Hagan Tech Talk: It’s Not That Simple, Or Is It?
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Summary
Considering the plethora of forces moving markets (CTA positioning, bristling geopolitics, mutual fund year-end and individuals’ tax-loss selling, dysfunctional domestic politics, QT, sentiment extremes, EPS expectations, slowing/accelerating economy or both, etc.), it’s concerning that Wall Street continues to espouse specific levels of importance for equities and interest rates. Rarely are things on Wall Street as simple as they seem. Let’s evaluate directional trends, areas/ranges of importance, near-term positive divergences, and a few other charts of note.
Up, Down, and/or Sideways
While Wall Street is focused specifically on the 5% level for the 10-year Treasury yield, even with yesterday’s sharp reversal from up to down, domestic interest rates continue to record higher troughs and higher peaks, the simple definition of an uptrend.
Figure 1: Domestic Interest Rates (weekly data) with resistance (red) and support (green). The next layer of resistance for the 10-year yield is between 5.15% and 5.26%, not 5%. Until support is broken and/or the pattern described above changes, the weight of the evidence (directional trend) remains higher.
The following is a compelling chart courtesy of John Roque with 22V Research. Included in John’s chart, but not shown here, is Robert Soros’s observation that “The bond market never lies.”
Figure 2: 10-Year U.S. Treasury Yield. What new shock will be necessary to curtail this trend and create a bid for safety, the renewed buying of domestic Treasuries, and the start of a bottom-building process across the fixed income (and equity) spectrum? That has yet to be determined. Stay tuned.
Side Note: While I will stick with directional trends, the following was shared with me last week: “The chorus of voices calling for a bounce in 10Y Treasuries is getting louder, and one day after Morgan Stanley said that 5% is a ‘great entry point’ for Treasury longs and Goldman recommended buying TSY calls, this morning UBS desk trader writes that Treasury bonds hit capitulation on Thursday and it should mark the end of the current multi-asset unwind cycle that started on Aug. 1st. The first price target for TLT upside is 91.4.”
Using closing prices, the S&P 500 (SPX) continues to record a short-term pattern of lower price peaks and lower price troughs, the simple definition of a downtrend. However, a short-term positive divergence has developed (Figure 3).
Figure 3: S&P 500 with momentum (MACD). Please see the verbiage inside the chart. However, to settle the argument about whether we’ll see more positive divergences and the start of price stability or a continuation of the downtrend, we need to see indications of strong upside demand, such as a series of new breadth thrusts or expanding new highs. Otherwise, the directional trend is likely to continue.
Additional Chart(s) of Note
Figure 4: Regional and Big Bank Indices. We felt the bottoming process would be long and arduous, and it has been. Notice the layers of overhanging selling pressure (resistance—red lines). Until there is some resolve with the regional complex specifically, this is one of the anchors holding back small-cap proxies. In other words, as the regional banking complex goes, so go small-caps (Figure 5).
Figure 5: Small Cap proxy with stochastics (weekly data). Deeply oversold, more so than at the COVID lows in 2020 (lower frame, green horizontal line) and near prior price troughs (support—top frame). If this is going to bounce, it needs to happen soon!
Figure 6: Apple versus the Technology Index. If we lose AAPL relative to its peer group, meaning the relative strength line breaks down further and the stock continues to underperform its peer group, and considering its weighting in many domestic equity market indices, large-cap growth weighted indices will be hard-pressed not to “whoosh” lower. Watch closely.
Figure 7: Gold Contract and Gold proxy (monthly data). Inflation or not, this hasn’t been a good place to make money over the past few years other than occasional shorter-term trades. Considering Gold’s proximity to resistance (red horizontal lines) and unless a decisive topside breakout occurs, I maintain that Gold is a hedge against “Event Risk” at best.
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Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 10.22-23.2023. Chart source: Stockcharts.com unless otherwise noted.
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