Monday’s weakness looked to be an important short-term negative, which could result in US Stock indices pulling back to test January lows due to heightened tariff fears. While Equities experienced an intra-day bounce on Monday, the damage looks to have been done structurally, as the pattern does not look complete. Moreover, the US dollar is also looking to push back to temporary highs, which could happen over the next two weeks. While I continue to view this consolidation in US Equities as being a temporary affair that should offer the opportunity on any test of January lows, it does happen to line up with much of the post-election year weak seasonality in Q1. The weakness into mid-February should prove to make Equities quite attractive on a risk/reward basis. Furthermore, it’s likely that Technology should be able to stabilize this month and begin strengthening again following its recent consolidation.
Monday’s -1.5% lower open qualified for one of the worst opening prints in recent years, and the only other instance this happened in the past two years was 8/6/24. A few happened around the time of the March 2020 pandemic but failed to occur even during the Global Financial crisis of 2007-2009. Data compiled by Bloomberg shows that between the end of 2006 and the end of 2019, the worst opening print was –1.4%, which was beaten on today’s open.
While the market did rally intra-day on reports that Mexico’s compliance in sending 10,000 troops to the border would delay tariffs by a month, market breadth still finished at greater than 2/1 negative.
As can be seen below, the SPX failed to climb back above the area of last Friday’s lows but merely filled the gap before starting to roll over again into the close.
Technically, I expect that the act of breaching the late January lows means that this pattern is unfolding as an ABC-type Elliott-wave pattern.
Thus, if my thinking is correct, there still stands an excellent chance of a bit more weakness over the next 1-2 weeks before a market bottom. Furthermore, if/when this pullback unfolds as five waves, it should make SPX quite attractive from a risk/reward perspective.
Overall, I do not expect that the fear of Tariffs will lead Equities down more than another 3.5% lower roughly, and the area near mid-January lows looks appealing to expect some support if/when this area is tested.
S&P 500 Index
Seasonality normally points to 1st Quarter weakness
Recent stock market turbulence doesn’t seem to be too out of the ordinary if history is any guide.
Seasonality studies by Jeff Hirsch at Stock Traders Almanac show that markets normally consolidate gains in Post Election years from February into March.
Given that near-term patterns seem to indicate possible weakness back to January lows before any short-term bottom, I suspect that the excitement over Canada’s Trudeau also complying with Trump might prove short-lived.
Overall, 6031 seems important for SPX, while any decline back under 5923 should likely lead to the 5850 or 5800 area near the January 2025 lows before finding much support.
Dollar rally might carry DXY back to 111
While both Mexico and Canada seem to have taken measures to avoid tariffs for 30 days, the US Dollar still seems poised to push back to new monthly highs.
While the Dollar should be near an area where a larger selloff starts to get underway, the newfound Tariff worries have served to buoy DXY in recent days.
Structurally, the act of having pushed over 108.50 intra-day has shifted the short-term technical picture in the US Dollar to bullish for a minor move back to new all-time highs.
This might temporarily derail the Emerging market trade, but ultimately should result in both Mexican Peso and Canadian Dollar starting to stabilize and rally in the weeks to come, in my view.
Japanese Yen actually failed to show much weakness during this recent strength in the Dollar, and the weakness has largely occurred in Majors like the Euro and Pound Sterling.
U.S. Dollar Index
Performance over the last month shows Large-cap Technology as one of the worst-performing sectors
A difficult month for Technology resulted in both SPX and QQQ underperforming Equal-weighted S&P since December.
Yet, the charts on both SPX and QQQ look far better than RSP -1.33% , Invesco’s Equal-weighted S&P 500 ETF.
As can be seen in this performance table, ranked based on 1-month returns, Healthcare and Financials performed the best over the last month, while Consumer Staples and Large-cap Technology performed the worst.
I specifically mention “Large-cap Technology,” not Equal-weighted Tech, as RYT showed gains of nearly +3.30%, which exceeded the performance of four other Equal-weighted Sectors out of 11: Discretionary, Real Estate, Utilities, and Consumer Staples. Meanwhile, XLK -1.16% fell -0.74%.
In the short run, given weakness in MSFT 0.22% , NVDA 2.29% AAPL -2.95% , SMCI 12.44% , ON -2.67% , DELL 1.36% , it still appears like a bit more weakness in Technology might occur before markets can bottom.
Seeing stocks like MSFT, NVDA in particular, demonstrate more concrete signs of bottoming out will help to add conviction that stock indices can rally, in my view.
Large-cap Technology Performance
