Despite the ongoing volatility, this week’s price action suggests short-term stability for US Equities and likely can begin to lead markets higher in a “2-steps forward, one-step back” type fashion in the weeks ahead. Multiple technical factors have come together to show an inflection this past week coinciding with breadth and volume capitulation at a time when sentiment had reached the most negative levels in years. Technology’s rebound from support this week is another reason for optimism, despite Thursday’s minor setback, and should help to drive markets higher into mid-May. Thus, while trends and momentum remain negative from mid-February, seasonality and cycles show a rally developing following signs of tariff fatigue from Equities, with many stocks have stopped falling despite any meaningful new developments. Going forward, SPX 5500, QQQ-466.43, and DJIA-40,661 remain key areas to exceed to have confidence, and these could be exceeded heading into next week. At this point, it remains premature for me to consider this a bear market, nor should the US economy enter a recession.
Three important takeaways are possible from Thursday’s session:
- US Equities sold off on far less negative breadth than the positive breadth and huge low-to-high range, which happened on Wednesday. Thus, the net result wasn’t too damaging to the trend.
- Trump and Bessant’s comments seem to have occurred right near the lows of Thursday’s volatile session. Going forward, those who are interested in short-term price swings would be well-advised to pay close attention to the POTUS Truth Social account, as increasingly, announcements seem to be occurring which can be market moving.
- There seems to be a Treasury and Trump “put” on the market after weeks of ignoring the negative price action. (This likely is more based on bond market volatility and possible unrest in the Swaps market and Basis trade unwinding than anything regarding Equities.)
Overall, my technical thought process is that a pushback higher to challenge and potentially briefly exceed 5500 could be possible into next week. However, it should still prove difficult to exceed the ongoing downtrend line. Furthermore, any further bounce might still face a “backing and filling” period before a larger rally in early May gets underway. Most of this time-based analysis is based on the combination of Elliott-wave theory and Gann cycles.
As shown below, the key area remains SPX-5500. As seen below, momentum indicators like MACD remain downward sloping and trends are also negative. Thus, a push back above 5500 is necessary sooner than later to help the current trend start to improve.
S&P 500 Index
Gann’s Mass Pressure index seems to show rallies into May 19th before a pullback from higher levels in June
As shown below, Gann’s Mass Pressure index likely should be taken seriously this year, given its success in having pinpointed mid-February as having represented a peak for the 1st Quarter.
Following consolidation into March, this curve does trend higher into mid-May before showing a pullback into June.
Given that May 19th lies 90 days from the February 19th peak this year, mid-May takes on special significance and could be important as a turning point.
As shown below, the larger rally begins in June, which could carry US Equities much higher in the back half of the year following the turbulent 1st half.
Thus, the course for the year hasn’t changed dramatically based on too much deterioration, technically speaking. Moreover, cycle composites like the one below seem to indicate that Equities should be able to recover. In the short term, regaining March lows in all indices will prove important as a first step.
S&P 500 Index (SPX)
Swap Spreads require a move back above last August’s lows to begin stabilizing in a more proper fashion
The chart below shows Swap spreads which showed volatility earlier this week following the breakdown under last August 2024 lows.
Whether it was based on regulatory trades like fixed floating swaps going awry or an unwinding of the Basis trade (which was reported yesterday), the rapid backing up in yields seemed to get the attention of the Administration very quickly earlier this week.
The news of the temporary tariff postponement led markets sharply higher and helped the swap spreads stabilize on Wednesday. Thus, the art of regaining prior lows with regard to these spreads would help to bring about stabilization at a time when it is thought necessary.
USD Swap Spread
Option Adjusted Spread (OAS) hasn’t really widened meaningfully
This popular gauge for assessing credit risk hasn’t really approached levels of concern as shown in the chart below. (This provides insight into how much additional yield (spread) an investor earns over a risk-free benchmark (Such as US Treasuries) after adjusting for the impact of embedded options.
Given that a higher “OAS” often indicates higher credit risk, or potential liquidity concerns, it’s comforting to see this gauge at far lower levels than what has been witnessed in recent years.
The weekly OAS spread chart by Optuma going back 15 years shows that Spreads are nowhere near prior periods such as 2008-9, 2011, 2016, or 2020. Thus, despite hearing reports of junk bond spreads “blowing out”, this gauge tells a different story.
BofA Merrill Lynch US High Yield Option-Adjusted Spread
Spread between LQD and JNK is also not at alarming levels
When utilizing ratios such as the Investment grade corporate bond ETF (LQD- Ishares IBOXX) in ratio form to the High Yield Bond ETF (JNK- SPDR Bloomberg), we see that this ratio has just neared the prior peak from last August in 2024.
Thus, this appears like a very orderly move at a time when many are concerned about economic uncertainty and potential liquidity concerns.
Thus, the act of this spread moving higher indicates that High-yield ETF is not declining more relative to the Investment grade ETF. However, it doesn’t seem to have reached levels of concern based on prior periods of market unrest.
Division Spread of iShares iBoxx
Gold Stocks continue to show strength; GDX is at its highest since 2011
One of the top performing areas in the market right now continues to be Gold stocks, as VanEck Gold Miners ETF reached the highest levels in more than a decade.
While Equities look set to begin a rally higher into mid-May, Gold and Gold stocks still have allure at current levels despite the runup in recent weeks.
This move in GDX has made this quite attractive, technically speaking, and I still see GDX moving higher, which might eventually challenge all-time highs after the price action has just started to show more upside acceleration.
Given the deterioration in both Silver and Copper stocks lately given the tariffs possibly hurting China, it’s right to favor Gold and Gold stocks until both Silver and Copper can begin to repair their damage in a bit more convincing way.
Newmont Mining (NEM) proved to be the best performing stock in the SPX on Thursday, returning +4.49%.
VanEck Gold Miners ETF
