Arguably, the trend for both SPX and QQQ remains bullish, while some short-term trend damage did happen with RSP and IWM, which makes these more technically negative for the days ahead. Tuesday represented a distribution day for the broader US Stock market as NYSE market breadth was negative by more than 3/1 bearish. Interest rates continued their climb, despite a better-than-expected core CPI number, and I suspect that higher long-term rates will be something the Equity market might react negatively to in the short run. However, as discussed earlier this week, SPX pullbacks, if/when they occur, likely don’t materialize into anything more than 2-3% drawdowns ahead of a rally into August. For SPX and QQQ, any daily close under 6237 or 551.63, respectively, might result in weakness into July expiration. However, trends shouldn’t experience much weakness in July before turning back higher to rally into August. As always, while today’s breadth was a negative, it’s important to see if Technology will be affected and/or lead SPX or QQQ to break down or whether the market simply undergoes internal distribution before heading higher. At present, there isn’t sufficient technical weakness to make this call.
As the chart below shows, US Equity markets (via the Equal-weighted S&P 500 ETF (RSP 0.68% ) have been showing distribution since peaking on 7/10, yet it’s proven to be a rather unusual week of trading over the past five days.
Technology has managed to hold up in resilient fashion and buoy the market while the broader market has been slowly retreating.
Today’s decline in Small, and mid-Caps proved above-average, but yet SPX and QQQ only showed minor intra-day pullbacks from early highs.
The question is whether markets can absorb a broader short-term decline given Technology’s influence while digesting this weakness and then turning back higher.
My view is that Technology should eventually be affected, as Monday’s outperforming stocks like NVDA 1.23% , AMD 3.87% , SMCI 0.80% have reached near-term overbought conditions and might require consolidation.
Interest rates spiking up on the long side might prove to be a catalyst for why this can happen, but thus far, ^SPX and QQQ 0.95% have merely consolidated sideways and have not shown material weakness.
As shown below, the act of RSP 0.68% having closed down at lows of the session after its trend break likely can show some minor follow-through this week with key support near 179-180.
Movement back above $184 is needed to erase this damage and help RSP turn back up to challenge February peaks.
Overall, today’s price action was the first sign of weakness across the broader market despite ^SPX and QQQ 0.95% not having been affected. It’s important to keep a close eye on 6239-^SPX (which, if broken, would lead to a test of 6200) or 551 in QQQ 0.95% , which should act as support in the days to come.
Invesco S&P 500 Equal Weight ETF
Treasury yields could prove to be the market’s biggest worry in the short run
Tuesday’s benign core CPI report did little to assuage the bond market and yields promptly pushed higher with ^TNX rising by 4 bps to close at 4.483.
To reiterate some of the short-term thinking on ^TNX, my view is that 4.55 is tested this week and if this is exceeded, it paves the way for a test of May peaks at 4.623%.
Structurally, this could also be surpassed in the short run, but I do not expect a move above 4.80% in ^TNX right away before yields peak and turn back lower.
US Government Bonds 10 YR Yield
FXI has achieved its own short-term breakout and is likely to outperform in the weeks ahead
Tuesday’s report of better-than-expected economic data from China, along with the NVDA 1.23% news, seems to have jump-started FXI -0.58% in Tuesday’s trading. These numbers are below:
- (China June Industrial Output rose 6.8% Y/Y; Estimate was +5.6%).
- (China Retail sales rose +4.8% Y/Y; Estimate was =5.3%).
- (China 2Q GDP grew +5.2% Y/Y; Estimate was +5.1%).
This coincided with a greater than average spike in the China Large-cap Equity ETF from Ishares (FXI -0.58% ) up to the highest levels since March of this year.
I expect to see a push up to $39-$40 in FXI -0.58% and then $42, and believe that Tuesday’s gains should follow-through higher given the technical breakout.
iShares China Large-Cap ETF
US Dollar looks close to peaking despite a short-term breakout
DXY has now risen for the last two weeks and has coincided with a similar move in US Treasury yields since both bottomed on July 1.
While today’s extended range could help this to push up to 99.50-100, I am skeptical of any larger technical rally in the US Dollar index. Weekly and monthly MACD remain negatively sloped, and this recent rally is pushing up to just near the bottom edge of its Ichimoku Cloud.
Thus, similar to thinking on ^TNX, I’m skeptical that the recent rally has much longevity. However, it’s hard to say with lots of conviction short-term that a peak should happen immediately.
My view is that both ^TNX and DXY peak out within the next couple weeks and begin a sharp slide back lower.
U.S. Dollar Index
