S&P 500 Index (SPI.X) + CBOE Interest Rate 10-Year (TNX.I)

On the surface it seems like another great week for stocks, but cracks have started to appear beneath the surface of the current rally.

On the positive side, the S&P 500 closed above 5,000 for the first time ever this week! In the last couple of days, it has started to see-saw around that level with bears knocking it down Tuesday and the bulls fighting back on Wednesday.

These gains come in the face of an ongoing series of layoffs, particularly in the Technology sectors, many of which have been tied to earnings reports. Meanwhile, it appears that investors are starting to grasp at straws to keep the rally going. Last Friday, markets climbed on a downward revision to last month’s US consumer price index report, a news item that traders never usually look at. Then on Tuesday when this month’s US inflation report came in hotter than expected, investors quickly ran for the door.

We also have seen a number of extreme moves in stocks around earnings reports, suggesting that the current rally could be in its speculative later stages with traders chasing momentum. ARM Holdings spiked 56% a day after reporting earnings and gained 103% (it doubled) between Feb 7 and Feb 12. Meanwhile, Tuesday night, Lyft spiked 58% in aftermarket trading on incorrect guidance from management, gave it all back in the ensuing correction and then rallied 33% the following day anyway.

With earnings season winding down the few large companies still reporting may attract significant attention in the absence of other news, particularly Nvidia* reporting on Wednesday and Booking Holdings* reporting next Thursday. On Tuesday, earnings season for retailers kicks off with results from Walmart and Home Depot.

Market breadth has contracted in recent days. Even with the record highs, US equity markets are up less than 0.5% in the last week, and the majority of international markets are down 0.5%-2.0%. Asia Pacific trading was quiet due to the Lunar New Year holiday. In terms of sectors, yesterday’s market rebound carried several sectors back into the green on a 1-week bases. 9 of the eleven main industry groups have climbed over the last week, led by Technology, Industrials and Consumer Discretionary. Materials, Real Estate and Energy have been the weakest groups over the last week.

Meanwhile cryptocurrencies have been running again with Bitcoin soaring back up above $50,000 in another sign of investors chasing returns in speculative markets, a sign that mainstream markets may be getting richly valued. The VIX volatility index has been on the rise since the start of the month, spiked on Tuesday but then was driven back down yesterday all suggesting that while markets remain generally complacent, it would not take much for fear to ramp back up.

Tomorrow is options expiry day for this month, which may be driving some of this week’s volatility and the unwinding or relaunch of positions could add to trading swings over the next few days, especially with this being a long weekend in North America.

Today and tomorrow are busy for US economic numbers, headlined by retail sales and producer prices. The economic calendar is relatively quiet next week with the main reports being Canadian inflation numbers and Flash PMI reports next Thursday.

In this edition of Equity Leaders Weekly, we look at the recent new high for the S&P 500, and what a recent rebound in treasury yields means for markets.

*Shares of Nvidia and Booking Holdings are held in portfolios of SIA Wealth Management.

Here at the Equity Leaders Weekly, we usually utilize point and figure charts to focus on long-term trends and filter out short-term distortions. Sometimes, however, at potentially key turning points, candlestick charts can be helpful for analyzing short-term trading action.

In the case of the S&P 500 Index (SPX.I) a number of bearish signals have emerged in recent days suggesting it may be close to a short-term peak and vulnerable to a near-term correction. The Index has been steadily marching higher since October. Since December, however, SPX has been climbing to new highs, but its RSI indicator has been peaking at lower highs, a growing negative divergence that suggests upward momentum has been slowing.

Since the beginning of February, a downward trend in volumes on up days has emerged (green bars) only broken by jumps in volume on down days (red bars) a sign that accumulation may be shifting to distribution.

In the last few days, the index gapped up above 5000, held there for two days and then gapped back under 5000, a pattern very similar to a bearish Evening Star. Yesterday, the index rebounded up off of uptrend support but stalled right at 5000, a sign of growing round number resistance, leaving recent gaps in place.

Initial downside support in a correction could appear at a January low near 4845, then 4,800 where the 50-day moving average, the bottom of a gap and a recent breakout point cluster.

To call off recent bearish signs and signal the start of a new upleg, SPX.I would need to close above its recent intraday high near 5050. Should that occur, next potential resistance may appear near 5075 then 5130 based on measured moves, followed by the 5250 round number.

Trends and direction changes in traded interest rates, particularly the US 10-year treasury note yield (TNX.I) have had a significant impact on trading in equities and bonds. A rising yield has coincided with expectations of a hawkish Fed, while a falling yield has aligned with expectations of a dovish (or less hawkish Fed).

Advances in TNX.I has coincided with market selloffs in the spring of 2022, the late summer of 2022, and September-October of 2023. The most recent market rally which started in early November, plus market rallies in the summer of 2022 and the fall 2022 post market bottom bounce have been sparked by falling treasury yields.

The strong rally at the end of last year coincided with a pullback in TNX.I from above 5.00% to below 4.00%. While the equity market rally has extended into 2024, investors should note that TNX,I bottomed out last month and has been climbing, indicating an emerging potential headwind for stocks and bonds.

On Tuesday, TNX.I completed a Double Top breakout, signaling the start of a new upswing, on the back of higher-than-expected US consumer prices, a sign that inflation hasn’t been defeated and weakening the case for interest rate cuts any time soon, while reinforcing the “higher for longer” theme we have been getting from central bankers around the world in their speeches since the start of this year.

Upside resistance appears at the October peak near the 5.00% round number. Initial support appears near 3.95% based on a 3-box reversal and an uptrend support line.