Markets have begun the process of bottoming out and have carved out the first meaningful move off the lows since late last week on above-average breadth data. Overall, it’s thought that a rebound in Equities might help to cure some of the poor sentiment readings at a time when the “hard” economic data has failed to show much deterioration. Technically speaking, the rebound in Technology, along with large-cap Financials and Discretionary in recent days, is encouraging, and it looks doubtful that SPX will require any movement under 5600 and should begin to turn back higher into next week. As discussed in previous days, the combination of sentiment data turning fearful followed by an above-average surge off last week’s lows looks bullish for Equities in the months ahead. Overall, it looks right to position long with movement above 5703 on a close, leading to a meaningful rally back to new all-time highs. The downside should be limited to roughly 3%, while the upside back to new all-time highs should get underway to carry SPX up more than 9% initially.
(My comments yesterday referenced the 50-day moving average for SPX, which were intended to mean the 5-day moving average (SPX currently sits near its 50-week moving average). Sorry for the confusion.)
As shown below on hourly charts, SPX has been rather choppy in recent days following its initial surge off the lows late last week to near 5700. Friday’s expiration proved to be a non-event for price action, though some late buying helped SPX finish mildly positive on the day.
Overall, I expect a push-up to test and break out above 5703 next week, which should kick-start the rally into late March/early April. These borders, shown below as resistance and support, mark the current boundaries of the price action in the last week. Given the improvements in breadth, along with the constructive ability of many large Technology stocks to hold their intermediate-term trendlines this past week, I view the market as being attractive for a large bounce into April.
As mentioned earlier in the week, the “early warning bell” did, in fact, ring early last week when two consecutive high breadth days happened following a high Equity put/call ratio. While the high TRIN readings (Arms index) never appeared to show true capitulation at the lows like what sometimes occurs, I am skeptical that this is needed before US indices start to turn back higher. After all, comparing technical readings following a 10% decline vs. historical times when SPX has declined 40%+ into bear market lows is an “Apples to Oranges” comparison.
Leading sectors going forward should be Technology, Financials, Industrials and Consumer Discretionary. However, for those who express skepticism of a low being at hand, having some exposure in Utilities and/or Healthcare also makes sense in the weeks ahead. The Hourly SPX chart, showing its recent weekly range, is shown below.
S&P 500 Index
Oh No! Death Crosses abound… Now What? Normally, these crossovers are not worth paying much attention to
The financial media reported that the Russell 2000 index along with popular Technology stocks like NVDA showed “Death Crosses”. (This involves a 50-day moving average undercutting the 200-day moving average.) This development is something the Financial media usually likes to mention as something that Technical Analysts like to watch out for.)
Stocks like NVDA, shown below, showed a Death Cross on Thursday of this past week. Unfortunately, I don’t find these moving average crossovers to have much predictive power, and normally, the end results are often a “coin flip” at best. Moreover, given the long-term upward-sloping bias of the stock market, the results on SPX, not stocks like NVDA, when looking out three months or longer, typically tend to be quite positive, not negative, as might be thought.
My technical thinking, is that NVDA’s ability to have recouped its prior lows should drive the stock back to new all-time highs. NVDA remains one of the best of the Semiconductor stocks, despite its recent woes since last Fall. Initial resistance could materialize near $135 and then $161, $180. Only a drop under $105 would prolong the recent consolidation, which is an alternate scenario that I don’t expect at this time.
NVIDIA Corporation
Death Crosses often don’t live up to the hype
As shown below, here are the occasions that ^SPX has formed a Death Cross, where the 50-day moving average undercuts its 200-day moving average. Unfortunately, while moving averages are always important in showing how healthy a stock or index is at any point in time, it’s normally better to consider the upward or downward-sloping nature of a moving average or how high above or below a moving average a stock or index is trading. While I often use the MACD indicator (Moving Average Convergence Divergence) to see trends of stocks or indices on daily or weekly timeframes, I don’t find much use for either Death Crosses or Golden Crosses in my work.
See the 49 instances where a Death Cross has occurred and the resulting returns going forward. As seen below, the returns 3, 6 months and 12 months going forward tend to be positive, based on the median return, not negative.
While a Death cross is premature for SPX now, it has happened in the Russell 2000 and also in NVDA this past week, so I felt the returns below would be helpful to shed some perspective on this.
Russell 2k likely will stabilize and start to turn higher in April
While many have been anxiously awaiting the bottoming of Small-caps and the beginning of outperformance, I sense that this time might be rapidly approaching.
IWM on weekly charts looks to be within three weeks of a meaningful bottom, with an ideal area of risk/reward attractiveness found at $190. (Note: IWM does not have to necessarily trade down to 190, but this would technically be a very attractive spot for IWM.)
Russell 2000 Ishares ETF – IWM
Small-cap IWM now has generated a monthly exhaustion signal in ratio charts vs. Equal-weighted S&P 500
The reason for my enthusiasm about a potential turn back higher in Small-caps has less to do with a price level on a chart however and is more related to the DeMark-related TD Sequential “13 Countdown” signal that just appeared on the monthly chart of IWM vs. RSP, as shown below.
This is the first TD Sequential signal that’s appeared on this ratio since the 2021 peak and should be watched for evidence of turning back higher in a manner that would provide confirmation. (A monthly close above the close of four months prior on this ratio chart would confirm the signal.)
As seen back in 2020, a TD Combo monthly signal appeared right near the 2020 lows that coincided with a very large rally and roughly eight-month period of outperformance.
However, this same signal appeared again in 2023 and proved to be not nearly as successful.
Overall, when the absolute chart of Russell 2000 shows a weekly DeMark-based exhaustion signal, which then leads this ratio chart to turn higher and confirm its “buy” signal, US markets will likely exhibit some above-average momentum in Small Caps.
For now, confirmation arguably is premature. However, the signal is now apparent on a monthly chart on a standalone basis, while the weekly IWM chart could signal a TD Buy Setup in as little as three weeks’ time.
Overall, I feel that Small Caps are close to turning higher. However, despite these signals, it’s imperative to be patient until they’re confirmed.
IWM/RSP
