This remains a choppy market for US Equities in the near term as part of a stellar ongoing intermediate-term uptrend, which has shown no evidence of deterioration despite any of the recent DeepSeek and/or Tariff-related volatility spikes. Despite the positive recovery in Technology lately, the broader market continues to lag, and indices like Equal-weighted S&P 500, DJ Transportation Avg., and Russell 2000 remain well off highs hit last December. However, sentiment regarding tariffs and their possible negative implications for the US Stock market has gotten quite bearish for both the Equity and Bond markets in recent weeks, which I think is a positive. I suspect that an upcoming Equity market breakout is growing near, given the failure of a hot CPI reading as well as tariffs to cause much Equity index weakness. Intermediate-term trends are technically bullish, and SPX appears unlikely to undercut 6000 before turning higher to surpass 6121. Such a move would likely coincide with a move up to 6300 initially with intermediate-term targets at SPX-6650.
As discussed above, the early weakness proved to be a non-event for SPX and QQQ, as the weakness failed to show deterioration before prices managed to grind higher to recoup most of Wednesday’s losses in Equities. While the selloff in the bond market proved stronger and failed to reverse to the extent that Equity indices did, this volatility is thought to be short-lived, giving way to an eventual move back to new all-time highs for SPX.
As QQQ shows below, nothing has really served to derail its pattern despite the slowdown in Technology in January. The strengthening in NVDA and AAPL from recent lows, coupled with the strength in Software, should allow QQQ to test and break out of its two-month triangle pattern in short order.
The area from 532-534 (Technically 532.10-533.82, to be exact) has served as QQQ resistance since late January, having been tested successfully twice in recent weeks.
It’s thought that a coming move back over 534 should happen which could result in strength during the back half of February. Investors should keep a close eye on any daily close over 534, as this would serve as an official technical breakout which would drive QQQ up to 548 initially with intermediate-term resistance near 562.
Invesco QQQ Trust
Treasury yield bounce should not exceed January peaks
Given the hotter than expected CPI report on Wednesday, the bounce in Treasury yield served to rattle stocks early in the session, as both sold off simultaneously.
Stocks largely recovered, while Treasuries did not. Wednesday’s auction brought about lackluster demand, with the bid/cover of 2.48 being the lowest in four months’ time.
In the short run, this is arguably mildly bearish for Treasuries over the next couple of weeks, as yields looked to have made a minor breakout.
However, I do not expect the 10-year US Treasury Yield Index (^TNX) to surpass January peaks before stalling and turning back lower.
Unfortunately though, for those familiar with how Stocks and Treasuries had shown such positive correlation over the past couple years (Stocks negatively correlated with Yields since mid-2022), a bounce in Yields on Treasury supply and/or hotter inflation data might not allow the Equity breakout to proceeds as quickly as if yields were falling sharply.
It’s my belief that this breakout likely proves choppy over the next 1-2 weeks before heading lower. It will be interesting to see if Equity indices will continue to show positive correlation with Treasuries during this time, or if this correlation can break as Equities start to turn higher.
Until notice of breakouts happens in Equities, it’s thought that Equities likely perform better than Treasuries for the balance of February until yields start to turn back lower. The diagram below shows a possible path for 10-year yields in the days and weeks to come.
US Government Bonds
Inflation expectations have been rising, but this doesn’t automatically mean inflation has to also move higher
As shown below, the 1-Year, 2-Year, and 5-Year Breakeven rates have been escalating quickly in recent weeks, which can’t all be blamed on the new administration’s policymaking.
As this chart shows, most of this rally started back in September when the FOMC cut rates 50 basis points (b.p.) ahead of economic data suggesting the labor market was in better shape than many thought.
The key takeaway, however, is that Autos seems to be the biggest driver (which should prove temporary). At the same time, Shelter remains in a two-year downtrend, and until more clarity is known regarding policy, it’s hard to put too much stock in rising expectations, automatically translating into higher inflation. Seasonality has often been cited as a driver for CPI for January, which is not dissimilar to what happened last January. However, for now, Wednesday’s “hot” data clearly seems to have put further rate cuts on hold.
Inflation Expectations
Shelter has been falling for two years despite this minor bounce ,which could have been a seasonal
It’s important to take a close look at the trend for Shelter, which many know represents the largest part of recent CPI readings.
Despite Wednesday’s higher than expected readings, it’s hard making the cast that Shelter has begun to trend back higher.
This weekly chart showing the rapid rise during COVID-19 followed by the rapid decline seems to suggest that trends are still headed lower.
Furthermore, January’s reading wasn’t unlike the spike which happened during the prior January, which makes it possible to blame some of Wednesday’s “hot” data on seasonality.
Shelter
Transportation Services does look to have made a minor breakout of its recent range
While Shelter has been trending lower over the past two years despite last month’s higher reading, one can’t say the same about Transport services, which showed the highest reading since last October within Core Services (which make up 61% of CPI).
While it’s doubtful that Motor Vehicle Insurance will be able to continue to push higher in the months ahead along with used and new car prices, the Transportation Services category within Core Services did break out of a fairly well-established range this past month.
Using the same technical tools on this data as one would with stocks, bonds, currencies, and/or commodities, it appears like this could continue to turn higher in the months to come.
I’ll continue to monitor this, but I felt the breakout was worth sharing, given that it represents a fairly well-contained sideways trend over the last six months.
Transportation Services
