SPX’s technical trend, breadth, and momentum began to turn more bullish late last week, and the move above SPX 6021 has now pushed up to challenge all-time highs. Technically, short-term trends (between now and the end of January) likely will require consolidation ahead of a broad-based move back to new all-time highs, and Wednesday’s negative breadth was an interesting development given the renewed pushback into the Magnificent 7/AI stocks. DJIA, RSP, and IWM all remain underperformers on this bounce, and TNX and DXY are now nearing short-term support. The rebound in Healthcare, Financials, and Industrials look particularly important as positives that should carry SPX higher over the next 3-5 weeks. While the risk/reward doesn’t look as appealing between now and the end of the month, any ability to consolidate 38-50% of the rally that began last week should put the SPX in a very favorable risk/reward position.
As discussed, technical trends for US Equities have turned more bullish, and a move back to new all-time highs in many US indices seems to be underway. In the short run, however, there appears to be some serious degree of lagging in the Equal-weighted S&P 500, Russell 2000 ETF (IWM -1.56% ) along with the DJIA. Each of these has managed to rally to the exact 61.8% Fibonacci retracement area of the pullback since December 2024 highs, an area of short-term resistance.
While the strength in Technology has been an important driver of US index returns this week and the return to AI/Magnificent 7 strength, it will be even more important when other US Index gauges also begin to show some strength.
Interestingly enough, it’s important to point out that the Bottom in US Equities last Monday (1/13/25) directly coincided with a peak in US Treasury yields as well as the US Dollar. The fact that both DXY and TNX are now nearing some short-term support could be important for the Equity market as a negative if this correlation continues to hold. (DXY, TNX sold off as Equities bounced, and now might make a small bounce which might coincide with Equity weakness). Thus, this might bring about consolidation into the FOMC meeting.
However, the broader message of this past week remains that of constructive strength back into many of the former early 2024 “risk-on” leading sectors like Financials, Industrials, and Consumer Discretionary which all began to stall out and consolidate into year-end.
Bottom line, the “Sell the rumor, Buy the News” looked to be a particularly relevant theme into the US Inauguration, as many of the broad-based tariff threats thus far seem to have been exaggerated. Thus, the prior fear looks to now be turning into optimism.
Overall, I don’t see SPX likely retreating more than 50% of the rally which began on 1/13 right away before likely pushing up above 6300.
S&P 500 Index
Small-caps have joined DJIA, and Equal-weighted S&P 500 is underperforming on the bounce from 1/13 lows
While most are concentrating on the huge pushback to AI and Mag 7, there have been some notable underperformance in DJIA, Equal-weighted SPX, and also IWM vs. NDX today, and one can see IWM is right up against Ichimoku Cloud resistance, not dissimilar from RSP and DJIA.
SPX, to its credit, is challenging all-time highs, but it would be beneficial to see some broader-based participation take hold. As of Wednesday’s close, Equal-weighed S&P 500 index ETF (RSP -0.91% ) finished lower, and SPX showed a roughly 3/2 ratio of Decliners to Advancing issues.
Overall, while IWM is expected to push back to new highs this Spring, I expect a short-term retracement down to IWM -1.56% , potentially down to fill the open gap from 1/14-1/15 near $220.23 before pushing back to challenge and exceed last November 2024 highs.
iShares Russell 2000 ETF
US Dollar looks to have peaked out
The biggest takeaway by far since the Inauguration seems to be the Overestimation of aggressiveness of Trump’s trade policies, as 11 of the 16 major currencies all rallied against the Dollar after Inauguration Day, setting up a larger decline for the US Dollar at a time when positioning has grown extreme.
As discussed last week, there was a big chance of “Sell the Rumor, Buy the News” in Risk assets, meaning that stocks and bonds had both slumped in December into January, but since the Inauguration, both have rebounded.
The US Dollar index (DXY) on an hourly basis, shown here, has violated larger uptrends, and is making an Elliott-style 5-waves lower. This is bearish for the US Dollar and has directly coincided with Yields making a similar decline, while SPX has risen 5% since last Monday’s lows (1/13/25)
While some backing and filling is possible for DXY, it should come from slightly lower levels, as shown below, to create the final leg down of this move. History might be giving investors a warning, as the US Dollar also dropped during Trump’s first year in office in 2017.
DXY Index
Dollar Positioning has hit the highest levels in years
US Dollar Positioning has grown to the highest Net long level in years (Since 2019), which could likely coincide with a reversal in the US Dollar index (DXY) at a time when investors have likely overestimated the possibility of “Across the Board” tariffs, which thus far have proven underwhelming.
This chart shows both the Citi FX Pain Index (Blue) and the Net Dollar CFTC Positioning (White). As the US Dollar begins to turn down, I expect this will help Emerging markets start to strengthen, & The equity markets of India, along with hard-hit Equity markets like Mexico and China, might have been overdone and ripe for a larger bounce.
US Dollar Positioning
