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S&P 500 Index (SPX.I) & Russell 2000 Index (RLS.I)

Equity markets held their ground through to the end of 2023. The Dow finished the year at a new all-time high, while other indices finished within striking distance of completing a full recovery from the 2022 bear market, retesting their previous highs which were set at the end of 2021. December was a particularly positive month for small cap stocks as the Russell 2000 Index (RLS.I) gained over 10% over the month in a big catch-up rally, a positive sign of increasing bullish breadth.

Boosted by falling treasury yields, stocks and bonds staged a relentless advance over the last two months of the year, with barely any pauses or corrections along the way. It’s not so surprising then, that 2024 has started off with some profit-taking, particularly in the technology sector.

The US 1-year treasury note yield has bounced up from near 3.80% toward 4.00% and the US Dollar has also started to rebound. Commodity action has been mixed with Crude Oil selling off, Natural Gas bouncing back, and metals struggling. Cryptocurrencies have been particularly volatile, soaring into year end, then selling off sharply yesterday.

The global correction to start the year has been widespread across geographies and has encompassed both developing and emerging markets. In terms of sectors, Technology and Materials have been hit the hardest recently, while Health Care has been the relatively strongest sector.

So far pullbacks have been moderate, with a few sectors registering 3-box reversals on 1% charts but not much more than that to date. Economic news has been disappointing with Manufacturing PMI reports from around the world generally coming in below expectations and below 50 in contraction territory. There are still a number of reports due this week, including ADP payrolls and Service PMI reports today, followed by tomorrow’s US nonfarm payrolls and Canada jobs reports, plus wage inflation numbers.

Confession season, the time in the quarter where companies are most likely to put out profit warnings, has started and has been quiet so far, although there have been a few more layoff notices. Earnings season gets underway in earnest on Friday the 12th when several big US banks are scheduled to report results. Corporate news may pick up as early as Monday once kids are back in school and more people are back from holidays.

In this edition of Equity Leaders Weekly, we compare large and small cap stock action and look at what the S&P 500 retesting its previous peak and a rally in Russell 2000 are telling us about investor sentiment.

S&P 500 Index (SPX.I)

The Russell 2000 Small Cap Index (RLS.I) is commonly utilized by investors as an indicator of risk appetite/tolerance among investors and for breadth confirmation of market trends.

One concern about the 2023 equity market recovery was that much of the gains were concentrated in a small number of large cap stocks in a few sectors, mainly technology, communications and industrials. In November, interest sensitive sectors like Utilities, Financials and Real Estate, staging big comebacks was encouraging but still limited to big caps.

In December, the equity market recovery broadened out and participation increased dramatically with the small and mid cap troops finally following the large cap generals higher. In particular, the Russell 2000 Index (RLS.I) staged a very strong rally, climbing up from a successful retest of its October 2022, and driving up through all of the trading range that has prevailed for the last eighteen months and snapping a downtrend line.

RLS.I has kicked off 2024 with a bullish Spread Double Top breakout signaling the start of a new upleg and confirming that the broader bull market in stocks remains intact. It also suggests that the recent pause or correction in large cap indices may be related to investors taking profits in the early leaders which perhaps have become overbought and overextended and redeploying their capital down the food chain into catch-up plays.

Next potential resistance for RLS.I appears at previous lows near 2155, followed by the 2380 to 2480 zone where previous peaks plus several vertical and horizontal counts cluster. Initial support appears near 1880 based on a 3-box reversal.

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