Monday’s downside follow-through undercut areas that are thought important for early this week. QQQ also broke an intermediate-term uptrend, while Technology looks to have violated support vs. SPX. None of these are considered positive at a time when SPX had been attempting to stabilize. Overall, our recent selloff has proven far more orderly and concentrated than desired for investors seeking evidence of capitulation. While that still might be ahead of us this week, SPX should be closing in on lows based on Elliott-wave structure and cycles despite the lack of DeMark exhaustion present. If there’s any positive thus far, it’s that the broader market has held up in better shape in recent weeks than the Tech dominated major indices. Meanwhile, there doesn’t seem to be much credit deterioration or defaults, and High yield spreads aren’t that wide at present vs. Treasuries. Overall, Technology certainly has the power to carry stock indices up or down regardless of how good earnings are at present. The bottom line is that it’s hard to have confidence in support levels until some type of stabilization begins and downtrends are broken. While I’ve suspected this should be close, there hasn’t been proof of it thus far as of Monday’s close.
Overall, the factors that look positive for Equity indices involve the following:
–Market breadth has held up and above 1/13/25- mid-January lows. Earlier in Monday’s session, five sectors were trading higher before the late-day selling (when looking at Equal-weight ETF). Thus, this remains largely a Tech driven decline, with large-cap Financials starting to weaken
-High yield spreads are only about 260 bps above Treasuries, there continues to be demand, and default rates are not going up.
-Sentiment is about as bearish as I can remember on the retail level. AAII Bears last hit these levels in 2009 and 2022 at bear market lows.
-The Elliott-Wave structure seems to suggest that markets are close to bottoming.
-Daily RSI levels are finally reaching oversold territory.
As shown below, the price looks to be right near the lows of this recent trend channel, and seeing a possible “Turnaround Tuesday” certainly wouldn’t be surprising. However, until the downtrends below are broken, one can’t rule out a move to 5500, which would equate to double the initial length of the decline from December 2024 to January 2025 when measured from mid-February. This also lines up near an important Fibonacci-based 23.6% retracement of the whole move up from late 2022.
However, SPX has officially closed below its 50% retracement level of the August 2024-February 2025 rally, and QQQ is below the 61.8% level of the rally from the same timeframe. This was thought unlikely a week ago, but given the deterioration in Technology, markets have not bottomed on schedule. I’ll share some charts below to help make sense of the recent selling pressure.
Hourly SPX has now hit the 1.618x alternative projection of the initial pullback down from December 2024 when measured from mid-February. Bounces will require a move above 5740 initially to think a bottom could be forming. The level above this, which remains important structurally, is 5865.
S&P 500 Index
However, the following are problematic to the idea of an immediate bottom:
–Technology and Financials made short-term pattern breakdowns, with AAPL starting to weaken more materially
-Lack of capitulation.
-No Excessive Equity Put/call readings.
-No TRIN readings (Arms index) above 2.5.
-Equal-weighted SPX remains above January lows.
-No true oversold readings on daily, weekly, or monthly charts (Note: Daily has just gotten to levels commonly thought of as oversold).
-Equity indices closed down near lows of the session after a minor stabilization attempt late last week, and market breadth got worse throughout the session.
Weekly SPX shows why 5500 has some confluence with support
The SPX weekly chart below shows that Ichimoku support, along with a 23.6% Fibonacci area, lies just below current levels and could be important by the end of the week. I feel that 3/14 might take on more importance as a turning point given cycles, and the ratio of Discretionary vs. Staples (not shown) and generally sharp weakness into spring equinox periods can often coincide with market bottoms according to W.D. Gann as spring gets underway. That lies right around the corner.
S&P 500 Index
Technology has made a short-term breakdown
The rapid pullback of 5%+ in AAPL -3.75% resulted in Equal-weighted Technology breaking down vs. Equal-weighted S&P 500. This level had largely held since early last year and does make the case for a Head and Shoulders breakdown in Technology relative to SPX.
While I have maintained an Overweight on Technology, Monday’s development could bring additional selling pressure to this sector. Stocks like NVDA, MSFT, AAPL, PLTR, and TSLA have all begun to show outsized selling pressure and have not yet shown evidence of bottoming.
While I do suspect this selling should prove short-lived (meaning could be over by the end of March, or even by the end of this coming week) it’s right to say that Monday’s breakdown was a technical negative for this sector and neither RYT nor XLK -0.89% show any type of exhaustion.
RSPT/RSP
AAPL breakdown might allow for a bit more near-term weakness
Today, the AAPL -3.75% 5%+ decline is problematic for Technology, and its outsized weakness is a headwind for SPX’s progress. AAPL’s close finished near February lows, but its selloff is thought to likely hold January lows at 218.20.
This stock had been largely holding up quite well in recent months, so the start of some underperformance needs to show some stabilization sooner than later if SPX is expected to bottom out in the near future.
While NVDA had taken over AAPL as the top holding in SPX, the stock still represents nearly 10% of QQQ and is one of the largest holdings in SPX.
Until this demonstrates evidence of trend reversal in a meaningful enough way to help AAPL regain its uptrend line, which had been broken, a possible retest of $218-$220 looks quite possible.
Apple Inc
Ratio of LQD to JNK likely should peak within three weeks
One of the bullish factors often cited for the economy and markets in 2025 is that High-yield spreads have been holding up quite well.
The spreads between Junk bonds over Treasuries is roughly 260 b.p. which hasn’t caused much alarm with many within the Fixed income community.
I often look at ratios of LQD -0.08% to JNK 0.01% (Ishares IBoxx Investment Grade Corporates vs. SPDR Bloomberg High Yield Bond ETF) to study if High yield corporates have begun to show any meaningful widening out which might be problematic.
Normally, looking at JNK on its own isn’t very helpful and as Treasury yields have fallen, there’s been some “hunt for yield” which has caused JNK to potentially do better than otherwise might be expected.
In the short run, the ratio of LQD to JNK has indeed been increasing, which can happen during “risk-off” times when JNK is falling at a faster pace than LQD.
However, as can be seen, the trend has been bearish since 2020 in this ratio. Furthermore, if DeMark exhaustion indicators are any guide, this rise might be done in roughly three weeks’ time due to the possible completion of a TD Sell Setup by late March.
Thus, I’m doubtful that this trendline, shown below, should be broken in the near future, technically speaking. The bottom line is that any stalling out and reversal in this minor bounce of recent weeks would point to High yield not experiencing a meaningful widening out vs. Investment grade (and by extension vs. Treasuries). Overall, when viewing the chart below, along with Option Adjusted Spread for High Yield corporates, one can get a feel of how High Yield is performing.
LQD/JNK
