SPX and QQQ at new all-time high territory has not yet been followed by similar movement from Russell 3k, Value Line Average, and DJ Transportation Avg, and this divergence will be important to concentrate on in the weeks ahead. Technology remains an outperformer after its recent breakout while Financials are starting to play “Catch-up”. Meanwhile, defensive sectors like Utilities, Staples are all starting to show evidence of hitting support, and likely are close to turning higher. Breadth has been waning in recent weeks while US Dollar and Treasury yields have begun to press higher which likely could bring about an upcoming consolidation for US Equities. At present, trends are bullish and trend reversals require a close back under 1/12/24 peaks to have even short-term concern. (SPX-4802.40).
The US Equity rally appears to be getting a bit tired, if the lack of follow-through on Thursday’s economic data was any indication. NASDAQ finished negative in Thursday’s session while SPX logged just fractional gains. Defensive groups like Utilities and Staples fared much better than Technology and Financials, but breadth finished at more than 2/1 bullish and all 11 sectors were positive. Overall, stocks seem to be in a goldilocks period where Consumer spending remains robust while the strong disinflationary trend has continued.
US markets appear to be nearing a key timeframe for trend change. The timeframe starts on Friday 1/26, and could materialize any time from Friday to early next week. This aligns with a 3-month anniversary of the October 2023 lows along with a 6-month anniversary of last July’s (2023) peaks. I expect that US Equities should be closing in on a minor window for possible trend change. However, any consolidation likely proves minor in scope and should bottom out into mid-February before a push back higher.
Overall, until/unless SPX gets back down under 4808, this trend remains stretched, but bullish and no indication can be made of a possible change of trend. Upside resistance lies at 4935-50.
Has Oil truly bottomed? Thus far, a low is early to forecast, but Thursday’s bounce is a minor positive for momentum, despite bearish wave structure
USO -0.77% , the US Oil Fund, is an ETF that some investors utilize to track the movement of WTI Crude oil. Thursday brought about a sharp move higher in Energy as WTI Crude rose back above $75.
Overall, I’m still a bit skeptical that Oil has truly bottomed for the following reasons:
- Elliott-wave structure shows a fairly well defined five-wave decline from last Fall. While an ABC corrective bounce began in December and is extending after Thursday’s minor breakout this likely halts in the mid-$70’s and then could turn back lower to new lows.
- Cycles appear to show February as being a key month for WTI Crude to bottom. Thus, I don’t feel December’s bottom was all that meaningful from a time perspective.
- Price remains too close to 52-week lows to have conviction on a move back to highs. This will take time. Until then, it’s right to expect a possible upside follow-through to the mid-$70’s, technically speaking for USO.
If/when front month WTI Crude oil futures eclipse $81.50, greater conviction would be possible towards thinking that a more meaningful low is in place. Furthermore, when Energy ETF’s exceed their respective downtrends (Currently in XLE, OIH, and XOP) than this would also be comforting technically. Until that time, this initial burst of strength off the lows looks like a trading bounce only.
OIH has also not broken out and has traded up to resistance
Energy ETF’s like OIH, XLE, and XOP have not really broken out on this past week’s lift in Energy. ETF’s like the VanEck Oil Services ETF (OIH 1.56% ) have successful rallied back to near an area of a prominent downtrend.
However, this level has not been broken. Furthermore, prices lie near a difficult spot which lines up with the larger downtrend since last Fall.
Overall, it’s tough technically to weigh in that OIH 1.56% (VanEck Oil Services ETF) along with other Energy ETF’s have broken out until/unless their existing downtrends are exceeded. Initially, this requires a move back over $300 but one might use $310 to have more conviction.
Ideally, this initial bounce might fail in Energy and lead back down to recent lows into February. That would create a much more attractive risk/reward for Energy. I still expect that Energy turns up sharply this Spring into the Summer and then Fall. However, this likely is a February -August type event.
OIH 1.56%
Small-cap divergence is troublesome; However, this eventually should be resolved
There have been 11 times since 1950 where a bear market of 20% or greater in S&P 500 reverses and has led back to new all-time high territory.
Roughly half those occasions coincided with a similar movement in Small-cap indices like Russell 2000 back to new high territory as well.
This month’s breakout to new highs in SPX was unusual, however, as Small-cap gauges like Russell 2000 were trading more than 20% off their all-time highs.
While this doesn’t mean that the SPX breakout is false, or needs to be immediately reversed, it’s normally thought to be a healthier situation if a breakout to new highs happens in broad-based fashion across various capitalization styles.
I expect that Small-caps eventually should play “catch-up” to Large caps and this might happen between March and August of this year as Treasury yields begin to rollover and turn back lower.
For now, there remains a fairly prominent divergence between the performance of Large-Cap Technology to that of many Small (and mid-cap gauges)
On an equal-weighted basis, only three of 11 sectors are positive for the year, despite SPX being at new all-time highs. Here’s a table below showing this divergence of SPX to Small-caps.
Movement back to new highs in SPX following Bear market lows and Small-cap percentage above/below All-time highs
Examining the performance of the SPX following its 20% or greater bear market drop since 1950, I listed the occasions this happened along with the subsequent duration of the move back to new all-time highs.
As can be seen, this is one of the more unusual moves to new highs as Small-caps lie so far below their own All-time high level.
As discussed, I don’t feel this makes the SPX move to new highs any less believable. Furthermore, the average return following a push to new highs in the six months ahead has averaged over 9%.
Yet, in the short run, I expect that the period from February into March/April might require consolidation as yields rise a bit further.
This likely will result in additional near-term Small-cap underperformance. However, it’s my technical view that Small-caps should bottom out in the Spring of 2024 and begin to push sharply higher.
