Note: There will be no publication tomorrow as the markets will be closed in observance of President Carter’s day of mourning.
SPX is still technically within its bearish short-term consolidation pattern that began nearly five weeks ago, and the last couple of days have produced even more short-term bearish pressure, which could allow for a quick move to briefly undercut January lows. Overall, my thesis is that a short-term low is approaching, but still might take another 2-3 days before prices reach support. Thereafter, this should allow for a bounce into the Presidential inauguration. However, the short-term breakout in Treasury yields and US Dollar remain bearish factors for Equities, and some evidence of Yields peaking will be important to trust any bounce in the Equity market. Bottom line, given Technology stocks like AAPL and NVDA are both nearing support, I suspect that SPX might attempt a bottom by early next week and begin to bounce into mid-to-late January. However, the extent of the breadth deterioration has proven severe in recent weeks. A rapid about-face increase in market breadth will be necessary to avoid February’s weakness in Equities, which is increasingly likely given the extent of short-term breadth deterioration.
The near-term picture still appears negative, and this was reinforced by the hourly SPX wave count which is apparent as of the end of day close from Wednesday, 1/8/25.
As can be seen below, S&P did manage to carve out five waves lower from Tuesday mid-day into Wednesday’s close.
This likely means that Friday’s Non-Farm Payrolls number and Unemployment rate might temporarily disappoint, sending S&P Futures back lower to test and undercut early January lows at approximately 5829.
S&P 500 E-mini Futures
Breaks of 5829 should prove short-lived, given that both AAPL and NVDA lie close to support. The area near 5700 looks meaningful, lining up near the 38.2% Fibonacci retracement zone of the entire rally from August into early December 2024. At present, this looks to be an important downside target for SPX and would make US indices a good risk/reward. Rallies might then transpire into late January.
Negative correlation between Treasury yields and Equities looks to have returned over the last month, but for how long?
How much are rising Bond yields truly affecting US Equities? That’s been the current narrative lately, given that ^TNX -2.61% has pushed up to the highest levels since last April’s yield highs.
Whether it be term premiums at 10-year highs, additional Treasury supply, Scott Bessant’s plans on issuing longer-term debt, economic growth exceeding expectations, or the fact that ISM has been spiking lately, Yields have been escalating, but yet it’s difficult to say how much of this is truly warranted or can be rationally explained.
Many in the media have discussed that President-elect Trump’s tariff plans will be highly inflationary, and this is a reason that Yields are rising. However, this has now become Consensus thinking and looks difficult to prove given other factors such as China’s or the US’s Energy production’s impact on inflation.
Overall, the rolling coefficient of changes in 10-year yields to explain changes in SPX earnings yields has fallen apart over the last year. Additionally, as shown below, the correlation since 2019 between US 10-year Treasury yields and SPX has largely proven negative since 2022. However, the period before 2022 showed nearly the opposite since 2019.
Thus, the current thinking is that good economic news is largely bad news for Stocks. However, I suspect that this relationship won’t hold indefinitely. As I’ve discussed in recent reports, it’s the velocity of the Yield move that likely matters more than the absolute levels. However, if my technical call for a turn back lower in TNX does not materialize in February and TNX gets over 5.00%, this likely would result in additional downward pressure for SPX, and this relationship below would continue.
S&P 500 Index
Industrials getting close to support
Following a steep two-month correction, the Industrials sector is nearing important trendline support, which can likely help this sector stabilize and return to a higher level.
Looking back at performance, we see that Industrials proved to be one of the better-performing sectors within S&P last year, and its 12-month return was approximately 20% (both XLI and RGI returned between 18.50-19.8% on a 12-month basis through 1/8/25).
However, Industrials has fallen 7% in the last month, the third worst performing sector behind REITS and Materials.
I suspect that this recent underperformance won’t likely last as the sector is now nearing important support vs. the S&P 500.
As discussed in my 2025 Technical Outlook, Industrials should be a group to Overweight this year technically, and I anticipate a bottoming out in relative trends within the next couple weeks.
The Chart shown below is a weekly chart of the Equal-weighted Industrials Sector (RGI) vs. the Equal-weighted S&P 500 (RSP -1.82% ).
RSPN/RSP
Russell 2000 looks to have a final pullback, which could spell an opportunity in the week ahead
Russell 2000’s Ishares ETF (IWM -2.05% ) has gotten very little traction lately as 2025 has gotten underway.
The lack of strength does not mean that Small-caps cannot work for 2025. However, given the rising bond yields, the Small-cap arena will demand patience until Treasuries can begin to turn back higher.
Technically speaking, the failure of IWM to extend this week has resulted in a sharp pullback over the last couple days. Unfortunately, this pattern likely could be resolved in a brief pullback to new lows given the overlapping, choppy structure of IWM’s pattern since mid-December 2024.
One should look at any break back down under December lows to likely constitute a better area to consider IWM from a risk/reward standpoint. However, at present, no technical evidence is in place just yet to suggest IWM should turn higher right away.
It should be mentioned that $217.85 does represent an area of intermediate-term trendline support from the 2023 lows. However, the shape of the recovery effort since mid-December casts some doubt as to whether this is the actual low of this decline.
Movement back down under $217.85 would result in a likely “final flush” (in my view), which would reach $204-$206, providing an excellent entry point for a counter-trend rally to get underway.
iShares Russell 2000 ETF
