The near-term pattern is wavering a bit, and SPX has pulled back to test 4088, which was thought initially important on any minor pullback. This is “Do-or-Die” support in the short run. Breaking 4088 would be a short-term negative, which could allow for a bit deeper near-term technical pullback before rallies can get back underway.
Given February’s tendency to be a more difficult seasonal time than January, I suspect that the ongoing uptrend from December 2022 might very well require some consolidation before we can immediately rally up to 4250.
To the market’s credit, sector-wise, the underperformance in some of the Defensive sectors looks to be a positive for US Equities, along with Technology’s relative outperformance.
Overall, any break of 4088 won’t have immediate support until 4032 at a minimum and might reach 3980. However, it’s expected this should be the extent of any weakness, and should provide a buying opportunity for a push back over SPX-4200.
Bottom line, violations of 4088 and failing to recoup this right away would be a warning for possible short-term weakness. However, the broader trends are positive, along with weekly momentum and bearish intermediate-term sentiment. Thus, pullbacks should prove minor and temporary, before support takes hold and takes prices higher.
Break of minor triangle is more bearish than bullish until recouped
A close-up view of price action over the last couple weeks shows that S&P formed a minor triangle that brought prices right down to make-or-break territory right into the Noon hour Thursday, just after Europe’s close.
This was an important Do-or-Die for SPX for Thursday, but instead of rallying back higher to take out 4180, prices broke below the bottom area of trendline support.
This is a minor negative in the short run, and needs to be recouped ASAP before rallies to 4250 and higher can get underway.
Performance on this pullback doesn’t look too worrisome
Interestingly enough, Thursday’s selloff doesn’t really have the makings of a strong shift towards defensive groups, nor Technology weakness that would be worrisome.
Normally ahead of or during the start of a decline, groups like Utilities, REITS, and Staples will show broad outperformance, while some of the former market leaders wane.
However, Thursday’s performance is far different from this positioning. While all major sectors but one is negative, the single positive sector is Consumer Discretionary, being powered higher by Casinos and Autos.
1-day performance data below of the GICS Level 1 sectors shows that Consumer Discretionary is outperforming all other sectors, but most importantly is outperforming Staples. Meanwhile, Technology is outperforming Utilities. Overall, this doesn’t seem that scary, and should provide a chance to buy into this pullback soon.
Sentiment seems to show Short-term ebullient opinions while intermediate-term sentiment remains clearly negative
Short-term, the following seem to be concerns from a bullish perspective, suggesting that sentiment has gotten more optimistic:
- The REDDIT Wall Street Betz crowd shows elevated sentiment, per Fundstrat’s Adam Gould’s model
- AAII just switched to bullish for the first time in months, albeit not a huge spread. (More Bulls than Bears) ( This typically is more relevant at extremes, but notable that this is the first time in months where AAII shows more Bulls than Bears)
- Zero days to expiration Options (0-DTE) are dominating trading right now. Last week’s Call option totals showed the highest call option trading ever.
- Investors Intelligence data is bullish along with CNN Fear and Greed Poll shows “Extreme Greed.”
However, on an Intermediate-term basis, the sentiment remains clearly still quite bearish
- CFTC CME non-commercial E-Mini S&P positioning still short -200k Contracts
- Global Portfolio Manager (PM) risk appetite is at 2-decade lows (Bank of America Portfolio Mgt Survey)
- Percentage allocation to US Equities among global PM’s is the lowest since 2005 (BofA Portfolio management survey)
- Investor Cash balances are quite high and have climbed in recent months
- Overall, while it might be right that near-term sentiment polls have escalated a bit coinciding with the best start for the NASDAQ in over 30 years, it’s thought that Equity selloffs should prove temporary and prove to be buying opportunities.
CFTC Treasury positioning now shows the most bearish sentiment since 2018
Also quite interesting in recent weeks is the extent that bearish sentiment has gotten elevated with regards to the Treasury market. When viewed in price terms, this rapid escalation of negativity translates into everyone believing that yields have to go higher.
My own cycle composites show that minor blips higher in Yields should be a chance to overweight fixed income, as I believe yields fall steadily into March and/or April before yields bottom.
Overall, the net-net takeaway to this chart below is that rates likely should continue to drop over the next month, not rise.
Furthermore, given the ongoing levels of negative correlation between Treasury yields and stocks which has reached the most negative in nearly 20 years, this seems to be a positive “arrow in the quiver” for Market bulls (Equities should rally as yields go lower).
The chart below is the Commodity Futures Trading Commission (CFTC) net Non-commercial Treasuries exposure (Non-commercial equates to large Traders/hedge funds).
(One translates this largely from a contrarian perspective- The shorter hedge funds are, the most likely they’re wrong as a group at extremes)