SPX’s technical trend, breadth, and momentum have slowly improved over the last two weeks, showing evidence of a “Two Steps Forward, One Step Back” type trajectory. Meanwhile, both TNX and DXY have begun mild bounces after the recent declines that both produced since the pivotal 1/13 inflection point (Bullish for Equities and Treasuries while bearish for US Dollar). Equal-weighted SPX has been outperforming over the last couple of weeks, but this looks to prove short-lived and should eventually lead to Technology regaining its footing after dismal performance from AAPL and NVDA. Overall, it’s premature to make the case just yet of pushback to immediate highs given Tuesday’s negative breadth bounce ahead of FOMC and the important economic data later this week. However, in my view, it’s right to be positive into mid-February, looking to make use of any 2-3 day weakness as a chance to buy dips, expecting that pullbacks likely prove temporary and not too damaging. In general, I suspect that downside volatility, if it occurs in the days ahead, should create attractive opportunities for US Equities between now and Friday. Thereafter, SPX likely should turn back higher and begin a run towards 6300.
Given Tuesday’s negative market breadth on a positive day for Equities (which proved to be nearly the opposite of the positive market breadth Monday, which occurred during a “down day”), we can see the effect of Technology’s movement on the benchmark indices.
Unfortunately, Tuesday’s bounce failed to reach levels that would help it gain legitimacy, while nine of 11 sectors fell on the day. To the market’s credit, having a strong one-day gain in Technology is certainly helpful, particularly when Large-cap Technology shows a much-needed recovery.
Overall, I like being bullish into mid-February initially, but am expecting that the next couple days might be “choppy” and potentially lower before SPX can begin more broad-based rally.
As stated yesterday, I’m doubtful structurally that SPX should undercut 5773 (1/13 lows). The next couple of days will help to add some clarity to the technical picture. At present, it appears like SPX has filled its gap on the hourly charts but could face near-term selling pressure if DXY and TNX continue a mild bounce.
The ideal spot for SPX to bottom would be just under Monday’s lows, which, in my view, might also find some support near the prior area of channel resistance from early December.
In extreme cases, SPX might revisit 5800-5850, but this is not necessary at the present time. All in all, I favor that mild pullbacks between Wednesday and Friday should represent a very appealing time to “buy dips” for those investors who care about the short-term tactical view.
S&P 500 Index
Small Percentage of SPX constituents outperforming the index is not bearish, it merely shows Technology’s strength
A few investors have pointed out that an unusually small number of SPX constituents have outperformed SPX over the last year, and the last couple of years have been under 30%.
While this might sound bearish, it’s also important to note the huge size of stocks like AAPL, GOOGL, NVDA, and MSFT within SPX.
If these stocks are pushing higher in a meaningful fashion, then it’s difficult for many stocks to keep up with the performance of SPX.
Correlations have dropped sharply in the last year, signaling a unique opportunity for stock pickers at a time when many have become consumed by movement in NVDA -2.88% .
Overall, to see this number rise substantially might require some poor performance in Technology, which would have a bearish impact on the SPX and QQQ.
Thus, while I do expect a broad-based rally to materialize, it might be a bit premature over the next couple of months until this begins to “play out.” For now, it’s right to own Large-cap Technology, which, despite its internal bifurcation, has not shown proper evidence to avoid it.
CTA Positioning in US Equities dropped off sharply since the US Election
Interestingly enough, the combination of fear regarding Tariffs, the path for the Fed’s Rate Cuts, and general uncertainty regarding new Administration policy has resulted in Commodity Trading Advisors (CTA) derisking quite a bit in the last couple of months.
It’s estimated that if SPX holds current levels and/or begins to push back to new highs, the act of having to add exposure for CTA’s might add 15-to-30 billion in assets to the market quickly (Bloomberg)
My other gauges of sentiment largely mirror this drawdown in positioning in recent months, as most have become subdued.
As discussed previously, the combination of lackluster sentiment with ongoing US uptrends in many stock indices and sectors, in my view, translates into a bullish opportunity for investors in the weeks/months ahead.
US Dollar has begun a short-term bounce after its decline from 1/13 established a new downtrend
The DXY decline in recent weeks has caused the technical trend to turn sharply downward, and the same path is apparent with US Treasury yields.
However, with regards to the Dollar, the action since Monday is suggestive of a mild bounce, which should prove short-lived and offer opportunities for those paying attention.
Given my bearish view on USDJPY, I don’t expect to see much bounce here before this turns over sharply. TNX actually seems more negative than DXY in the short run.
Given the correlation in recent weeks of Dollar declining as Stocks and Treasuries rose, any hint of a slowdown in this might adversely affect Equities in the short run (which happened today with Equal-weighted S&P 500 (RSP -0.72% ) negative by -0.49%) on the session.
Once the DXY starts to shift strongly back to the downside, this should prove to be quite bullish for US Equities and for Emerging markets, and this is expected in the months ahead.
U.S. Dollar Index
