Note: I’ll be on CNBC Thursday morning at 8 am. EST discussing technical market thoughts.
SPX’s technical trend and momentum have remained negative since early December 2024, but the post-CPI bounce in Equities has brought the price to near-important resistance, which will provide some clues/confirmation of a bearish trend over the next 3-4 days as to whether this bounce is sustainable. While the better-than-expected core CPI reading caused yields to plunge, there will need to be more evidence of Treasury strength to have confidence in a larger rally. The worries at this point solely revolve around the lack of bullish confirmation in price and momentum coupled with the very low level of market breadth. Overall, I like being in the market for a rally into mid-February. However, given a number of unconfirmed technical factors, one still can’t rule out some backing and filling in next week, which would provide an even better risk/reward opportunity for investors.
Yesterday I discussed that despite the 10 key reasons why SPX was getting ready to rally, it was difficult having conviction that a low was in place. I still feel this is the case, but am encouraged about the breadth in Wednesday’s session along with the drop in Treasury yields.
As shown below, SPX did, in fact, rally up to nearly challenge the ongoing downtrend from early December. My thinking is that until/unless SPX- 6021 is exceeded, there remains a chance for a “backing and filling” into the Inauguration. However, I will fully embrace this rally if/when 6021 is exceeded, as that should drive a larger rally back to new highs.
I suspect that the next 3-5 days should provide proof whether this bounce should stall out and begin to turn back lower, or head up and accelerate back to highs. Given the negative weekly MACD readings, abnormally low breadth (SPX issues above 50-day moving average at under 25%) along with current structure showing consolidation, it should pay to be patient.
S&P 500 Index
Positive divergence in NYSE Advance/Decline line provided an early bullish clue
While the extent of the breadth deterioration in recent weeks had been a concern, the Advance/Decline line for NYSE had given some minor evidence of some positive divergence in breadth despite SPX having pushed lower.
As can be seen, the break of the red uptrend for A/D was a negative on December. Consequently, the breakout of the green uptrend this week was a positive for short-term market breadth.
While much more strength will be needed to have confidence that a move to SPX 6650 has begun, this is an early promising sign.
Furthermore, any move back under 5800 in SPX likely won’t result in breadth turning down as meaningfully, given this week’s improvement. Thus, a very good bounce in breadth this week and any “backing and filling” likely results in positive divergence.
TRADCNYC Index
Financials sector breakout is very encouraging
Given that Financials represents 12.5% of SPX, the breakout in the Equal-weighted Financials ETF today (RYF) is very encouraging towards thinking the markets should be on better footing after the Inauguration.
RSPF broke the downtrend, which had been going on since early December. This should specifically help Financials show better strength over the next month.
While the Regional Banks bounce on Wednesday was encouraging, the Large-cap Banks rally in stocks like JPM 4.00% and BRK-B/B, not to mention AXP 1.72% , GS 1.14% , MS 1.44% arguably was even more bullish.
These latter five stocks are in better shape than many Regional banks and should be overweighted as Financials push back to all-time highs.
Invesco S&P 500 Equal Weight Financial ETF
