Just at a time when investors thought our market rally might be nearly invincible, we’ve seen a pretty important reversal in the uptrend in recent days along with a meaningful breakdown in Treasury yields. Yet, with a few days remaining in the month and quarter, S&P 500 is still set to record its best quarterly returns in over 20 years.
As we’ve been reminded, however, this directly followed its worst quarterly returns since 1938. A truly surreal V-shaped recovery at a time when little has been accomplished to erase the uncertainty. As most are aware, however, the stock deterioration didn’t just start this past week, but largely back between June 5-10, when 10 of our major 11 SPX sectors peaked out, including Russell 3000 which accounts for 98% of all tradable securities.
At present, the weakness remains short-term in nature, as it truly requires quite a bit of damage to truly break the spirit of a 40% three-month rally. Looking back, Nasdaq 100‘s push back to new highs above the psychologically important 10k mark certainly seemed like something to celebrate initially, as the mega-cap behemoths Apple (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and Facebook (NASDAQ:FB) represent massive percentages in many indices and sector ETF’s. Yet as this past week proved, even Large-cap Technology’s strength could not hold up stocks when nearly every other part of the market had begun a short-term pullback.
Importantly three major technical developments happened that seem worth paying attention to.
First, Treasury yields violated June lows across the curve, with violations of June lows by 2’s, 5’s, and most importantly perhaps, big breakdowns in the 10 and 30-year yields. This directly contributed to some of the weakness we saw in Financials last week, a group that rebounded for the first couple weeks of June but is now set to turn in the 3rd worst performance of 2Q, with returns of just 8.62%, nearly half the SPX’s performance.
Second, Technology on an equal-weighted basis finally showed some evidence of “wear and tear” as the RYT (Invesco’s Equal-Weighted Technology ETF) broke down under key 3 month uptrends vs SPX in relative terms, after peaking out right when most of the market did, back on June 8. Thus, Technology certainly has been, and is still thought to represent a key reason why stocks have held up so well.
Finally, the degree of internal weakness following the divergences was pretty blatant in signaling the start of a likely downturn. Most had seen that the S&P and DJIA were “sideways” for 4-5 days while the NASDAQ pushed back to new highs. This divergence was an initial sign that all was not as it seemed. Yet, then last Wednesday’s drop showed severe breadth deterioration of over 15/1 negative, and more than 90% of the volume on the downside while volume was nearly double the prior two days combined. Thus, the combination of cross-asset weakness with breadth and momentum deterioration played an important role for why stocks could begin at least a short-term pullback.
However, the weekly momentum remains quite strong and seasonality typically turns bullish heading into the month of July, as we’ve witnessed this month average 2.18% gains in the last 10 years, with 8 of the last July’s being positive. Sentiment still remains understandably mixed given the shaky COVID-19 related “Re-Opening” attempts by many states, and that was reflected in this past week’s AAII data which showed Bears still outnumbering Bulls by 24 percentage points. Finally, my interpretation of the Elliott-wave pattern from early June suggests this pullback should prove short-lived and buyable as July gets underway, with the pattern appearing like an ABC corrective move which is in its final stages of decline this week.
I am expecting last week’s weakness should possibly relate to the June 8-15th decline in price and time before bottoming, potentially this week. Thus, while this week has a potential to be negative, it’s likely that pullbacks represent buying opportunities for a push higher into July 15-16 (when the next short-term cycle hits) or near August 18-20.