Strategist Mark Newton flags signs of technical resilience
Resilient financial stocks are one signal the bond-market rout won't drive a bigger equity selloff, says Fundstrat.
While the bond market selloff has been unnerving some investors, it probably doesn't represent a crisis moment for a stock market that was just getting on its feet after the summer, chip-driven selloff.
So says our call of the day from Fundstrat's chief market technician, Mark Newton, who offers technical evidence in a new note to clients that shows "a lengthy selloff" is not getting underway.
Bond yields, which move inversely to prices, have been climbing on fears about inflation, government spending and surging corporate issuance as technology companies look to fund artificial-intelligence projects. One threat those higher yields pose is that they can lure investors away from perceived riskier stocks.
Newton starts with the Dow Jones Industrial Average DJIA, which he calls the "weak link" as it was the first major index to start falling - down seven of the last nine sessions. However, the Dow has now reached a key area of structural support, he says, as highs from July and an early August breakout are meeting up.
Also, an uptrend move for the Dow stretching back to March remains intact, and he expects the index will reach a short-term bottom this week, and become the first index to push back to fresh highs.
His second reason is that most stocks have been hanging in there even as major indexes drop, due to "resilient" market breadth - the number of stocks rising versus those falling. Newton notes the Russell 3000 McClellan Summation Index - a breadth indicator - is sitting near its June peak, and while drifting sideways, hasn't nosedived, which is often the precursor to a bigger downturn.
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"Stocks above their 50-day and 200-day moving averages both remain above 55%, with the percentage above the 200-day at roughly 65%," he says. "A market with two-thirds of its constituents above their long-term average is not one coming apart underneath, whatever the index happens to do on a given day."
Newton also cites a lack of credit trouble, noting that a ratio of the iBoxx $ Investment Grade Corporate Bond exchange-traded fun LQD to the State Street SPDR Bloomberg High Yield Bond ETF JNK has been falling. "High yield outperforming investment grade is a risk-on message, and the ratio sits near the low end of its post-2022 range rather than turning up," he said.
The strategist next turns to expectations of market volatility, examining the relationship between the Cboe VIX index VIX, which is a gauge of expected S&P 500 volatility, and the VVIX, which measures the volatility of the VIX itself. Newton contends that the market is not showing signs of extreme stress, which would normally cause the VIX to VVIX ratio, currently just 0.17, to spike higher. "Until it does, I expect any equity weakness proves shallow and short-lived," he says.
Finally, Newton turns to financials, which he sees holding up even as the equal-weighted S&P 500 XX:SP500EW has been falling. "Financials is the second-largest sector in the market and is the sector that normally starts to crack when risk-off is genuine. It's doing the opposite," he said.
"The steepening yield curve remains the key point as to why financials should continue to work," he says, adding that slowly rising rates are a benefit rather than a threat to financials, unlike utilities and real-estate investment trusts. A steepening yield curve can occur when yields of longer duration bonds rise faster than yields of shorter duration bonds.
Newton sums up by saying investors should not drop their guard completely, and should keep an eye on long-term interest rates, crude prices and whether tech can avoid giving back more of the ground it clawed back after the summer selloff.
"Bottom line, I like treating this weakness as an opportunity rather than a warning, with my expectation being for a push back to new highs before a choppier period materializes into September," he says.
The markets
U.S. stock futures (ES00) (YM00) (NQ00) are flat, as 10- and 30-year Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD30Y hold steady. Gold (GC00) and silver (SI00) are dropping.
Key asset performance Last 5d 1m YTD 1y S&P 500 7691.76 -0.47% 2.43% 12.36% 19.97% Nasdaq Composite 26,289.71 -0.59% 1.75% 13.11% 23.34% 10-year Treasury 4.701 0.00 3.30 52.90 40.20 Gold 4413.2 -1.25% 6.73% 1.87% 30.10% Oil 84.88 2.79% -1.85% 47.85% 35.07% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
The health of the consumer is in the spotlight with Target (TGT) reporting results ahead of the open, along with Lowe's $(LOW)$ and TJX $(TJX)$.
The Treasury will announce the results of a $16 billion auction of 20-year Treasury notes at 1 p.m. Eastern
SK Hynix (KR:000660) $(SKHY)$ said it will repurchase $28.6 billion worth of shares.
Minutes from the Federal Reserve Open Market Committee's July meeting will be released at 2 p.m.
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