Technically, Wednesday’s rapid About-face is a short-term negative and represents the beginning of a short-term decline following nine straight days of gains for SPX. Pullbacks into Friday of this week and/or next Tuesday (post the Christmas holiday) likely should prove buyable for a move back to exceed SPX 4818. Overall, this quick reversal of the big surge in US Equities should be buyable, but will require a bit more time.
The quickness of this holiday reversal for US stocks isn’t all that unusual given the lower volume period that accompanies most holiday trading. Moreover, after nine straight days of gains which had lifted SPX momentum to the highest overbought readings since January 2018 (per Daily RSI) a decline certainly shouldn’t have been ruled out, specifically given SPX, QQQ and also IWM having traded up to prior peaks.
As mentioned over the last week, neither SPX, nor QQQ, had successfully achieved a weekly close back above all-time intra-week highs (SPX-4818.63, QQQ-408.71) and IWM had failed to successfully make a weekly close above $200.
As mentioned, this current week represents typically the worst seasonal period normally for December in pre-election years, and consolidation following our recent steep run-up shouldn’t necessarily be required to coincide with a catalyst. However, there did happen to be an 0DTE options trade at 4755 which triggered the $1.9 billion selloff.
In the days ahead, the following points are important to note:
1) Wednesday’s decline proved to be the broadest-based decline since March
2) SPX, QQQ 0.97% and IWM 0.15% closed at near the lows of their respective sessions, undercutting lows of the last few days.
3) Attempting to buy pullbacks that close at/near the lows of the session following sharp reversal normally requires patience, and these aren’t normally immediately buyable after the first day of weakness
4) This decline ideally should take the form of a three-wave decline. I suspect that Wednesday’s pullback might represent the first leg down. If this is the case, then any minor bounce on Thursday likely will also be followed by selling pressure which might last into early next week.
Overall, given that “Santa’s sleigh” arrived early for investors in the form of a 14-20% gain in eight weeks for SPX, QQQ, this pullback also likely represents Santa coming early to deliver a holiday dip to buy into for investors that missed out on the gains from October.
Bottom line, I sense that a US Equity market pullback might last into Friday, or potentially next Tuesday before beginning a rally into year-end and likely through January. However, it’s difficult to suggest that a pullback to multi-day lows immediately makes SPX or QQQ attractive after these closed at multi-day lows near the lows of their respective sessions. Declines could take the form of a three-wave ABC Elliott-wave style decline that could create an actionable opportunity into next week.
S&P 500
Small-cap Russell 2000 ETF successfully broke out above prior downtrend vs. Equal-weighted S&P 500.
While the Ishares Russell 2000 ETF (IWM 0.15% ) failed to break out above the three prior peaks since last August on a weekly close, there has been a successful breakout in relative terms vs. the broader market in Equal-weighted terms over the past week.
The lack of a breakout before this week was something I highlighted in my 2024 Annual Technical Outlook as something that was needed before weighing in too bullish on the prospects for Small-caps into next year.
Despite Wednesday’s About-face in Small-caps along with the broader market on an absolute basis, I do feel that minor weakness in IWM 0.15% should be something to buy into next week given the success of the relative breakout over the last few trading sessions.
Initial support for IWM 0.15% could materialized near $193.64, which lies near the open-gap from Wednesday 12/13 into Thursday 12/14. Under that level would result in weakness to $190.
Bottom line, I like owning Small-caps on weakness given the extent of the momentum in recent weeks. I suspect that additional short-term weakness in the days ahead could bring about opportunity into next week.
IWM/RSP
Highest TRIN reading of the year could indicate additional selling
Relatively speaking, when the Arms index (TRIN- Bloomberg) registers readings over 2.5, markets normally are within a few days of making market lows following a selloff. Wednesday’s 3.69 TRIN reading was the most extreme reading of 2023, and normally quite unusual to witness after a steep market advance.
The Arms index is represented by the following ratio:
(NYSE Advancing/Declining Issues divided by NYSE Advancing Volume/Declining volume)
Thus, a high TRIN reading normally indicates very heavy downside volume. However, seeing high TRIN readings following steep runups are relatively rare, but in my experience are effective in suggesting short-term market peaks.
While the 0DTE option trade makes sense as a possible catalyst for the sudden selling pressure in the market, the outsized decline to finish at near Wednesday’s lows of the session seems bearish technically on a 2-3 day basis.
Overall, I suspect that a pullback to 4630 down to 4600 is a possibility for SPX. However, given the positive momentum and bullish ongoing trend from October, such a decline likely should represent a buying opportunity for a run-up into January. Once sufficient evidence of a short-term bottom is in place, I’ll be able to give projections on both price and time of where a rally into January might find resistance.
TRIN
VIX breakout likely should carry VIX up to 15.50-17 before another peak.
The breakout in implied volatility carried VIX index up over 9% to 13.64 in Wednesday’s session resulting in a close at multi-day highs along with an important breakout based on VIX’s Ichimoku chart.
In the short run, I suspect that additional upside is likely for VIX into early next week before this settles. I discussed reasons two weeks ago why a possible rally in the VIX was possible and much of this had to do with compressed implied volatility levels compared to the levels of realized volatility, specifically given the degree of cross-asset volatility.
Following a bounce in VIX into the Christmas holiday, I suspect that another decline might be possible into January as Equity prices recover and US Equity gauges push back to new all-time highs.
