Near-term trends still appear to have limited upside, despite Technology having outperformed in a way that’s largely holding up indices like SPX and QQQ to the detriment of Equal-weighted index gauges. US Dollar and Yields have shown more evidence of turning higher, and this could be a bearish development for stocks given prior correlation tendencies. Both Healthcare and Financials look to be at resistance and this could prove to be a headwind for Equities over the next month
Six sectors fell to new lows for 2024 on Tuesday, illustrating a much more broad-based decline than what many benchmark indices might imply given Tuesday’s -0.37% pullback. Transportation stocks along with Small-caps underperformed while Yields and the Dollar spiked.
Technology fell the least of any of the major 11 Equal-weighted sectors, lower by just 0.19%, and when viewing Technology based on its SPDR Select Technology ETF, XLK 0.73% , Technology managed to finish positive. Given gains in both Semiconductors and Software, Technology was able to successfully camouflage Tuesday’s performance in a way where most felt markets finished largely unchanged.
While many sectors have begun to consolidate gains, it’s hard to say that the major US Benchmark indices have begun official downtrends at present. Two areas stand out as being important for SPX: Initially, the intra-day lows near 4739 from last week. Second, 4682 is important as early January lows. Until at least the first area is violated, it’s still tough to argue that recent churning is anything more than consolidation. While I do expect this should begin to unfold, at present, short-term trends are more neutral lately than bullish or bearish.
Invesco’s Equal-weighted S&P ETF (RSP 0.10% ) is shown below, which suffered a bit more damage than what occurred in S&P 500 cash index (^SPX 0.16% ) on Tuesday. The near-term trend in RSP has been neutral lately and would turn bearish under 154 on a daily close.
US Dollar breakout paves the way for additional gains over the next 1-2 months before a decline back to lows
As discussed last week, the US Dollar has begun a counter-trend rally, and this likely continues in the next 1-2 months before a peak and subsequent decline back to undercut 2023 lows.
Tuesday’s decline in all G-10 currencies vs. the US Dollar resulted in a fairly pronounced rally in DXY (US Dollar index) which surpassed peaks of the last couple weeks to finish at the highest levels since early December 2023.
Technically I suspect Tuesday’s gains to follow-through a bit higher and expect this bounce to unfold as an ABC-type Elliott-wave style correction before a pullback to new quarterly lows.
Treasury yields rose along with the US Dollar and I expect that this combination, if it persists over the next month” should prove to be the technical catalyst that results in stock indices beginning a more meaningful correction.
Emerging markets have turned down sharply on US Dollar strength
The US Dollar’s strength led to a sharp downturn in Emerging markets, and the Ishares MSCI Emerging market index ETF (EEM 0.27% ) fell to the lowest levels in more than 10 trading sessions.
Overall, I expect weakness down to $37-$37.25 in EEM 0.27% before this stabilizes, and this could happen upon approaching intermediate-term trendline support.
One should hold off on getting too aggressive about buying Emerging markets and commodities as the US Dollar strengthens, but I suspect this will offer opportunity into the months of February-March.
At present, EEM 0.27% is weak, with many of the recent outperforming Emerging stock index ETF’s like EWZ 1.12% , EWW 2.14% having begun some corrective activity. China’s FXI -0.11% continues to weaken, and I’m anticipating a likely retest of 2023 lows before this can stabilize and begin to turn higher.
Yield curve has begun to rapidly “Disinvert”
As shown below, the 2/10’s curve has begun to steepen pretty dramatically in recent months as the 2/10’s spread is now back within 15 basis points from Zero.
This steepening is not unlike what’s happened on past occasions, as the 2-year yield drops faster than the rest of the curve on expectations that Fed rate cuts might be nearing. However, this year has proven a bit unusual as a recession is not really a consensus view.
In the short run, the important area lies at -9.82 basis points. Any move above this area would represent a technical breakout that should result in a further steepening (“dis-inverting” ) that could cause the 2/10’s yield curve to move back to positive territory.
My technical thoughts are that rates have begun to turn higher in a way that likely leads risk assets to consolidate in the short run. While I do expect ^TNX -2.12% gets down to 3.25% this year, I feel like a bounce to 4.50-4.65% could happen possibly between now and March before a rapid decline in rates across the yield curve.
However, in the short-run, all eyes appear to be on the 2’s/10’s curve and this area near -9.82 bps looks important this week.
