Recent selling pressure should be nearly complete following the pullback since 2/19. Short-term momentum has gotten oversold and many key large-cap Tech stocks look to be at/near support. Furthermore, Treasury yields and the US Dollar have been breaking down sharply, which is viewed as a constructive development for US risk assets. Moreover, sentiment has continued to grow more and more negative, given the constant rhetoric regarding tariffs and/or a growth slowdown, yet the Magnificent 7 looks to be trading near support. Overall, if Trump sheds any light on “meeting Mexico and/or Canada halfway,” as Howard Lutnick mentioned Tuesday afternoon, this would likely be considered a bullish catalyst for US Stocks. Overall, given the degree of counter-trend exhaustion seen developing in VIX along with SPY, QQQ and TNX, a reversal looks to be near.
Any hint of a possible deal to roll back tariffs even partially arguably should be viewed positively by US Equity markets and Technology
I discussed that markets very well could have a chance at weakening early and then strengthening later in the day on Tuesday. However, it remains quite difficult to try to “call a bottom” and I don’t see that as being prudent to do in this short-term downtrend.
While a low looks to be near, it’s right to let markets stabilize. Trump’s speech on Tuesday night very well could prove beneficial to markets if he were to share reasons to roll back tariffs, even partially, on Mexico and Canada, and Commerce Secretary Howard Lutnick seemed to feel this was a possibility following day-long discussions with both Mexico and Canada.
Despite this possibility, it’s important to concentrate on what is known at this point when eyeing the market technically.
SPX has gotten down to, but not below, January lows on a closing basis as of Tuesday’s close.
-This week’s decline has breached the uptrend from October 2023 lows, which, if not erased by the end of the week, would be a minor negative at the time that momentum continues to worsen.
-Counter-trend exhaustion signals could likely be in place on SPX and QQQ as of Wednesday’s close while are already present on TNX and VIX (TD Buy and Sell Setups, respectively) as of Tuesday’s close.
-QQQ looks to be very close to the 50% retracement level of its entire August-December 2024 advance, and the area at 482-485 is attractive support in the days ahead, if reached.
-MAGS 1.72% (Roundhill Magnificent 7 ETF) has also formed a TD Buy Setup and lies just above meaningful intermediate-term support when measured over the past year.
-DJIA and RSP have not shown the same deterioration as QQQ, and very well could underperform in the days to come, while Technology holds up and performs better. My analysis suggests that QQQ is ready to begin to outperform RSP after recent weeks of underperformance.
-SPX and QQQ are not technically oversold at current levels based on daily RSI, and weekly and monthly RSI are far from oversold levels. (This doesn’t mean that oversold levels are necessary before a bottom is in place.)
-Market breadth, while weak in recent weeks, remains above levels seen back in mid-January at the lows, which is a positive sign as multiple sectors have shown better performance than SPX itself since mid-January.
-Sentiment continues to look poor at the retail level and certainly not bullish at the Institutional level.
DJIA, as shown below, has not shown the same kind of deterioration as QQQ in recent weeks and has positively diverged. The Equal-weighted SPX ETF, or RSP 1.03% by Invesco, has also not weakened too substantially in recent weeks (though it also didn’t really participate in rallies from mid-January into early February).
Overall, I expect that DJIA could weaken to test 41,844-42,000 but should not undercut January lows at this time. Any weakness early on Wednesday likely would find strong support near January lows.
Dow Jones Industrial Average Index
Magnificent 7 looks to be right near support after recent weakness
The chart below highlights MAGS 1.72% which broke down sharply over the last three weeks, yet has arguably not done much intermediate-term damage.
The Magnificent Seven ETF – MAGS
I find MAGS attractive from current levels down to $46.50 and expect that recent weakness likely should bottom and attempt to rally back in the weeks and months to come.
Interestingly enough, DeMark exhaustion signals show a daily TD Buy Setup in place after Tuesday’s weakness, which likely will be seen in SPY and QQQ by Wednesday’s close.
Ratios of QQQ to RSP also near support and show DeMark-based exhaustion
The chart below illustrates why I believe that QQQ 1.39% should begin to stabilize relative to the broader market (broader market shown by Equal-weighted SPX ETF (RSP 1.03% ) after recent underperformance) and begin to turn back higher.
This means that QQQ likely should begin to outperform the broader market following QQQ’s decline to the right near the key support zone at 482-5, while DJIA and RSP might underperform large-cap Technology and QQQ itself.
The uptrend shown below connects the August 2024 lows with the December 2024 lows and intersects right near current levels.
Thus, despite the recent underperformance of large-cap Technology and lagging nature of QQQ vs. RSP in recent weeks, it’s difficult to find much fault with this larger trend.
Technology on an equal-weighted basis vs RSP (not shown) has also fallen to support and helps to make the case for a bottom in Technology following its pullback to “make-or-break” levels.
QQQ/RSP
Ratios of SPY vs. TLT should bottom sometime in March and turn higher
Given that Treasuries have been rallying lately due to growth fears and lackluster Economic data while Equities have been falling, the ratio of SPY to TLT has sold off sharply in recent weeks.
As seen below, this broke an uptrend from last Summer and has shown abnormally poor performance in recent weeks (Translated into SPY underperforming TLT).
Technically speaking, I don’t expect this to last much longer.
My own thinking is that this weakness in SPY vs TLT should be complete by late March and turn sharply back higher.
Such a development would mean that Equities bottom out sometime soon and also could mean that long interest rates might also bottom and begin a brief bounce higher.
DeMark counts on weekly charts show this to possibly reach a bottom within three weeks’ time, which translates into a mid-to-late bottoming in the ratio of SPY to TLT.
Thus, for those investors who have been favoring TLT lately, given the stock market volatility, I expect this to work for not much longer before this ratio bottoms and starts to trend back higher.
SPY/TLT
Source: Symbolik
