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S&P 500 Index (SPX.I) & iShares Semiconductor Index ETF (SOXX)

Equity markets have had their ups and downs over the last week, but overall trading action has remained constructive. Equity markets have been impacted a bit by Lunar New Year holidays and earnings season but have continued to trend upward. What is most encouraging about this rally is the wide and growing breadth of the recovery in international markets, with breakouts underway in Europe, Latin America and Asia, in developed and emerging markets and in China-sensitive markets including commodities.

Sector rotation also indicates growing investor confidence and risk appetite. Several technology and communications stocks staged significant moves up the rank in their respective reports, including names like Netflix, Nvidia, and Shopify, which have been highlighted in recent editions of the Daily Stock Report.

A number of cyclical groups have also been on the rebound including leisure and homebuilding. Among interest sensitive groups, capital has been leaving the more defensive utilities for the more cyclical regional banks and homebuilders (which we mentioned in the January 12th edition of the Equity Leaders Weekly). Commodity stocks, particularly miners and energy producers, have also been picking up on anticipation of a Chinese reopening boosting resource demand.

Yesterday, the Bank of Canada announced that it is pausing its interest rate hike program at 4.50% while it assesses the impact of moves made to date, but is continuing its Quantitative Tightening program. The Bank left the door open to a resumption of rate hikes in the future if needed. The focus on the future of monetary tightening now shifts to next Wednesday’s FOMC meeting and next Thursday’s Bank of England and European central bank meetings. Investors may look more to the Fed for signs of slowing rate hikes as well while the European banks are still in catch-up mode.

The coming week brings the end of the month and a number of key economic reports starting today with US GDP and continuing next week with Manufacturing PMI and ADP payrolls next Wednesday.

Meanwhile earnings season continues to ramp up. On balance, companies have been beating expectations but there have been some concerns about soft guidance. Headliners for the coming week include: credit card providers Visa and MasterCard plus Intel today, Chevron tomorrow, ExxonMobil, McDonalds, Caterpillar and GM Tuesday, and then next Thursday brings Apple, Amazon and Alphabet.

In this edition of the Equity Leaders Weekly, we look at a potentially significant technical turning point for the S&P 500, and at what a breakout in the semiconductor sector is telling us about investor sentiment and the global economy.

S&P 500 Index (SPX.I)

The S&P 500 Index (SPX.I) often used as a benchmark of global institutional sentiment, has increasingly been showing signs of bottoming out. A textbook bullish Head and Shoulders pattern has been forming over the last six months with shoulders in June and December and the head at the October low. Despite ongoing concerns over rising interest rates, the health of the economy and the prospects for corporate earnings, stocks have been climbing a wall of worry since tax loss selling season ended and the calendar flipped into 2023.

SPX.I has reached a potentially key technical decision point which has the potential to be resolved in the coming week. The index is currently testing a key downtrend line which is also a downward sloping neckline for the Head and Shoulders base near 4,040. A close above 4,050 would snap the downtrend, and complete the base to signal the start of a new uptrend.

In addition, the 50-day average (black) is close to crossing back above the 200-day average (green) which would be a bullish Golden Cross confirmation signal. Generally speaking, market action around the 200-day moving average has become more constructive in recent months. Back in August, a bear market rally failed short of the 200-day average; in November-December, the index peeked above it briefly before getting knocked back under; this month, the index has broken through and held above its 200-day average, a sign of increased strength.

Next potential upside resistance tests for SPX.I appear near 4,100 then 4,350 where a measured move and the August high converge. Initial support appears in the 3,940 to 3,955 area near the 50 and 200-day moving averages.

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