Near-term trends appear choppy, despite NASDAQ having pushed back to new all-time high territory on Thursday. Technology’s dominance has been a hugely successful factor in helping to buoy indices despite some of the underperformance in many sectors over the last three weeks. US Dollar and Yields have shown more evidence of turning higher, and this should eventually 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.
US Equities turned back up sharply on Thursday, albeit dominated by Technology in a way that resulted in a push back to new all-time highs for QQQ, while SPX and DJIA held under prior peaks. This divergence will need to be alleviated sooner than later to give some confidence about the longevity of this bounce.
Technology, to its credit, has managed to sharply outperform, with Software ETF’s like IGV 0.49% having rallied back to new two-year highs. Semiconductor indices like SOX have been even more positive, having pushed back to new all-time highs this week.
While both Treasury Yields and US Dollar have begun to strengthen more meaningfully over the past week (Treasury selloff) this hasn’t proven to be too detrimental towards Equities just yet, but has coincided with weakness in many of the Defensive sectors, but which also has adversely affected the Materials sector.
Over the final nine trading days of January, I expect an upward bias for Equities as DXY and TNX both retreat following this past week’s bounce. However, other groups will need to come to the rescue for Technology, as index performance and technical structure remains mixed in the near-term despite Technology’s dominance.
SPX still faces technical resistance just above 4800, and breaks of 4714 would result in additional near-term consolidation
While most investors remain closely focused on Technology, neither the SPX, nor DJIA has broken out to new all-time highs.
This negative divergence is thought to be important to resolve before weighing in on a continuation higher into February.
Less than 30% of all SPX issues are currently above their 20-day moving average as of Thursday 1/18/24, and breadth has unwound rapidly in the last week.
Financials on an Equal-weighted basis have dropped nearly 5% from the 1/8/24 peaks while Equal-weighted Healthcare is lower by roughly -2.5%. These two sectors represent nearly 25% of SPX.
Thus, while seeing Technology rally sharply is certainly a positive for US Equity averages and has helped to hold “the market” higher while many sectors have dropped this past week, Technology’s ability to camouflage the recent deterioration can only last so long, in my view.
It’s going to be important to see another broad-based recovery effort to have faith in this rally continuing. In the very short-run, SPX has roughly a 100-point range which will be important to monitor over the next few trading days.
S&P 500
Sector performance doesn’t appear too healthy, despite QQQ breaking out to new highs
When scanning the Equal-weighted and Cap-weighted sectors over the last week, a few things look important:
-Technology was the only S&P SPDR Select ETF to record positive performance over the last week
-Defensive sectors and Materials have been hit hard as the US Dollar and yields have pushed higher
-Seven Equal-weighted ETF’s have dropped more than 2% over the rolling five-day period into 1/18/24.
-AAPL 1.57% upgrades by Bank of America and NVDA outperformance are certainly positives for technology. However, AAPL now trades just below resistance near its recent gap-down, and NVDA is quite stretched at current level, in my view.
-Rebounds in Financials and Healthcare would help breadth begin to make a comeback, which I feel is vital towards having conviction on any rally. Near-term, the opposite has happened this past week.
Philadelphia Semiconductor Index (SOX) has pushed back to test all-time highs
Semiconductor indices like SOX rose more than 3% in trading on Thursday, far and away the most dominant part of Technology.
At current levels, SOX stands to make a new weekly all-time high close if Friday 1/19/24 shows a close at $4175.47 or higher (Current levels)
SOX certainly looks positive at new all-time highs and is difficult to avoid barring an imminent breakdown that would make this move to new highs false.
Stocks like AMD 4.05% , NVDA -1.63% , MRVL 0.83% , TSM have all been higher by more than 8% in the last week. This is certainly positive and something to keep a close eye on, given this sectors’ tendency to be a leading sector.
Overall, I have no reason to doubt this move back to new highs and most of my reluctance to “join the party” has to do with other sectors, not Technology. Until/unless SOX falls back under $3800, I like the “Semi” space and feel it remains a technically attractive part of Technology.
Semiconductors SOX
Utilities look to be within 2-3 days of bottoming
Utilites have dropped sharply in recent days, and the Sector has fallen more than 10% since peaking last month, in December 2023.
This deterioration occurred specifically as rates started to inch back higher.
My thinking is that TNX might require some backing and filling on its recent bounce, and could set up for a counter-trend bounce in the Utilities sector.
Overall, the area at $60 in XLU 0.52% is quite attractive to consider support over the next week. Counter-trend signs of exhaustion might form based on DeMark indicators and XLU has gotten oversold.
I expect that XLU 0.52% should be within 2-3 days of forming a low and likely begins to rally as Treasury yields retreat a bit in the next week. While I’ve advocated avoiding the Defensive sectors, and I still feel that’s correct for 2024, this sector looks to be close to signaling an above-average chance of a bounce in XLU. I feel this could happen near $60 next week.
Utilities XLU 0.52%
