SPX’s stalling out near all-time highs likely results in some coming consolidation for US stocks as part of the existing intermediate-term uptrend. In the short run, DJIA, RSP, and IWM have lagged behind the performance of SPX and look to be near resistance. Furthermore, US Technology has also pushed up to challenge meaningful resistance, which is suggestive of near-term consolidation. However, in the bigger picture, the breadth expansion, along with ongoing subdued sentiment, normally makes for a powerful combination for a broad-based pushback to new all-time highs across multiple indices. Additionally, both the US Dollar and TNX have begun to decline which also adds to the allure of stock indices pushing higher over the next month. While the risk/reward doesn’t look as appealing over the next couple of weeks until consolidation takes place, I expect pullbacks to prove short-lived and offer opportunity for investors, given the recent improvements in trend, momentum, and market breadth.
In the short run, Friday’s stalling out looked to be the first evidence of a possible pullback, which might get underway at the end of the month. SPX broke its uptrend from the 1/13 lows, and the US Dollar and Treasury yields look to have completed their initial pullbacks off the early January peaks.
While the lack of a move to multi-day lows still makes it difficult to say a corrective move is officially underway in stock indices, this looks to be close given Technology’s stalling out near former highs. However, SPX and the NASDAQ Composite did officially make weekly closes this week back at new all-time highs.
The same can’t be said for QQQ, nor DJIA, nor the Equal-weighted SPX, DJ Transportation Average, nor Russell 2000 which have all lagged the recent advance.
As shown below, S&P Futures did successfully break the uptrend from last Monday’s lows, despite S&P 500 index having achieved a new all-time high weekly close.
While it might take some time to occur, the risk/reward won’t be as favorable in the short term until SPX pulls back to retrace 38-50% of the most recent advance.
S&P 500 E-mini Futures
Overall, I don’t see SPX likely retreating more than 50% of the rally which began on 1/13 right away and might stall on consolidations into FOMC near 38.2% Retracement levels. Thereafter, a push up to 6300 should get underway.
Technology also seems to have reached short-term resistance
As seen below, the Technology sector, shown by Equal-weighted Technology ETF (RYT) has pushed up to challenge former highs along with the ascending uptrend line marking the highs of the channel connecting former peaks.
This is a temporary area of resistance only. However, following the recent runup, I suspect that Technology likely might consolidate into end of month, providing a better risk/reward opportunity to buy dips.
Invesco S&P 500 Equal Weight Technology ETF
US Dollar breakdown looks to be the biggest technical development of the week
The 1.7% decline in the US Dollar this past week looks to be the biggest technical development since the US Presidential inauguration and the largest one-week decline since 2023.
This move went directly against market expectations, given recent bullish positioning, and reiterates the key point that guessing what the new Administration’s policies might be or the resulting market movement could be difficult.
As shown below, this decline marked the first meaningful break of the uptrend which began last Fall for the US Dollar. The Japanese Yen is also close to beginning a powerful advance vs. the US Dollar given the BOJ’s hawkish rate hike Friday, and this likely begins in the weeks to come.
DXY, the U.S. Dollar index, carved out five waves lower for the first time in this most recent four-month uptrend, finishing at multi-week lows.
Overall, this is a bearish technical development for the Dollar and should lead steadily lower over the next couple months, which also might happen with US Treasury yields.
This has potentially bullish ramifications for Emerging markets following the recent deterioration in Equity markets of China, India, and Mexico, and I expect rallies in all of these in the months ahead.
U.S. Dollar Index
Emerging markets could begin a larger advance following initial signs of bottoming in EEM
The Ishares MSCI emerging markets ETF (EEM) looks to have bottomed at important support in recent weeks, and now looks to be starting to turn higher following the decline in the US Dollar.
This looks important and positive for Emerging markets, and my expectation is that many foreign equity markets, which had underperformed as the Dollar surged into year-end, should now begin turning back higher.
I’ll be watching India, Mexico and China the closest, and all three Equity markets have perked up lately as the Dollar has retreated.
In EEM, the key resistance area formed by the current downtrend line intersects at $43.50. If/when this is exceeded, I suspect that EEM likely should begin a rally back to challenge and possibly exceed last Fall’s highs.
In the very short run, a minor bounce in DXY might happen along with yields on a 1-2 week basis which coincides with a possible Equity market consolidation. If/when that happens, this would provide an attractive entry point for EEM for those who wish to buy pullbacks, vs. await the breakout.
At any rate, the move higher in Emerging markets looks to have started, and I sense that this could spell an opportunity for investors in the months to come.
iShares MSCI Emerging Index Fund
