After a strong rally in the stock market in the last several weeks, markets have been pulling back in recent sessions. Market corrections are typical, especially after a 25% rally in the S&P 500 over the past six months, but the tone in the markets in seems to have shifted.

The S&P 500 closed lower for the third straight week. In fact, the S&P 500 is down about 5.5% from recent highs and has dropped back for the last 6 consecutive sessions. That hasn’t occurred for more than two years.The technology-heavy Nasdaq was lower for the fourth week in a row and is now down around 7% off its intermediate rally high.

However, the interest-rate-sensitive parts of the market, including small-cap stocks and the real estate sector, have pulled back more. The VIX volatility index, sometimes referred to as the “fear index,” has climbed over 20 to new highs of the year and the highest reading since the market lows reached last October  

The S&P 500 first-quarter earnings season is underway –

While companies are beating forecasts, the outlooks they are offering have been softer than expected. Mega-cap technology firms, including Microsoft, Google, and Meta will all be reporting earnings next week, with investors closely watching for signs of any weakness. Netflix already reported strong numbers this past week but got whacked on the news. I consider that a serious sign of potential lower levels ahead, especially if the above-mentioned market generals react the same way

Market volatility after a strong run is not unexpected.

While calling the bottom of a pullback is notoriously difficult, corrections in the 5% – 15% range are typical in any given year. The more important consideration is whether a pullback could extend into a deeper or prolonged bear-market environment (with 20% or more losses)

The structure of the price on the charts of many market leaders has been indicating that some sort of sentiment shift could be occuring. Since the indices had not yet broken major support, it was still plausible that we would have to continue to look up to potentially higher targets. When support breaks, the market will leave no doubt. The masses may not believe it just yet, but we just may have struck multi-year highs across the indexes with the sharp pullback just in the last few sessions that appear to have broken initial KEY support on many market leaders

 The next few sessions will likely reveal the markets intent, but the near-term oversold McClellan Oscillator reading near -225 , the most oversold reading since last October, could delay any market downside extension at least temporarily

Be very careful out there as I expect volatile and perhaps whipsaw environment in the near term

And remember, trade what you SEE not what you think!

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Markets got off to a shaky start to the week and the second quarter, as strong economic readings raised concerns about if and when the Fed will be able to start cutting rates.

Despite growing nervousness around the timing and magnitude of Fed rate cuts this year, markets closed out a challenging week on an up note, treating the strong jobs report as an indication that economic growth, and thus corporate earnings growth, remains on a path higher, which should offer broader support to the bull market.

The positive stock-market reaction could be interpreted as an indication that the market is still assigning some probability to the economy continuing to hold up alongside a downtrend in inflation that is sufficient to allow the Fed to cut rates this year.

For the second week in a row, oil and gold posted solid price gains, extending a run of recently strong results for both commodities. U.S. crude oil was trading at nearly $87 per barrel on Friday afternoon, up from $83 at the end of the previous week and $71 at the start of 2024. Gold spot prices on Friday were around $2,345 per ounce, a record high.

As U.S. stocks fell particularly hard on Thursday, as the Cboe Volatility Index which tracks investors’ expectations of short-term market volatility, surged to its highest closing level in more than five months. The Cboe Volatility Index subsequently pulled back slightly on Friday but nevertheless closed about 23% higher than the previous week.

Also, from a valuation perspective, most valuation measures indicate that U.S. equity markets generally seem to be on the more expensive side rather than close to fair value, which would call for a bit more caution at this stage. In addition, a look at investor sentiment shows that while sentiment hasn’t reached euphoric levels yet, there are clear signs that plenty of optimism has already been baked into markets.

What does all that mean to short-term traders? Volatility should be on the rise and trading focusing on the technical patterns and indicators with intelligently placed targets and stops will be vital in the days and weeks just ahead.

And remember, trade what you SEE not what you think!

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The narrow market leadership over the past 12 months has captured investors’ enthusiasm around an elite group of mega-cap tech stocks known as the Magnificent 7 (NVIDIA, Microsoft, Alphabet, Amazon, Meta, Apple, Tesla).

This group accounted for the bulk of last year’s market gains and currently trades at an elevated forward price-to-earnings (P/E) ratio of 31. But that is still much lower than the nosebleed valuations of the Four Horsemen in 1999, which had an average P/E of 851. And unlike the late ’90s, the outsized gains last year in mega-cap tech have been supported by strong earnings delivery in both absolute terms and relative to the rest of the market.

The recent broadening of the market gains, with the equal-weight S&P 500 outperforming its market-cap peer, and with value-style investments outperforming growth over the past month, is a sign that the bull market is not exhausted and may not be close to done yet. Conditions appear to be more like the 1995-1998 period rather than the 1999-2000. The average stock in the S&P 500 trades at a reasonable 16.7 P/E, with more stocks and sectors participating in the rally, and 10 of the 11 S&P 500 sectors are higher over the past three months. For comparison, three months before the burst of the 2000 tech bubble, seven of the 11 sectors were lower.

Given the uninterrupted nature of the stock-market rally since last November, a pullback and consolidation phase would be expected. But the combination of resilient economic growth, a reacceleration in corporate profits, and the upcoming start of a rate-cutting cycle at a time when financial conditions are already easing, may help sustain the expansion of this bull phase. This environment should be supportive for stocks, particularly in areas of the U.S. market that have lagged and carry lower valuations.
The stock market has been seeing some welcome rotation into other corners of the market. Granted the communication services (+12.2%) and information technology (+12.0%) sectors have paced year-to-date gains for the market, but the first half of March has seen the energy, materials, utilities, and consumer staples sectors exhibit relative strength. The same goes for the Russell 3000 Value Index versus the Russell 3000 Growth Index.

More specifically, mid and small-cap stocks look particularly interesting. Historically, they’ve been among the strongest-performing asset classes 12-18 months following the last Federal Reserve rate hike, but they’ve lagged since the Fed’s last hike in July of last year. Mid-caps tend to be more cyclical than U.S. large-cap stocks but of higher quality than small-cap stocks.

In addition, Metals, led by Gold, were quite strong. Gold closed at a new all-time high last week, its first-ever close above 2100. The breakout comes as Bitcoin closes in on a new all-time high as well.
Crude Oil has shown a remarkably subdued reaction to the Israel/Hamas war. That could change if other Middle East players become officially involved. One key new element appears to be Suadi Arabia’s inability to get all players on the same page for production cuts. Crude closed at its highest levels of the year on Thursday.

It should be and likely will be quite explosive, yet volatile in the days and weeks ahead. I’ll be closely monitoring the technicals and the trends to asses the possibilities going forward, as usual, and will keep you posted daily.

And remember, trade what you SEE not what you think!

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Last week, the Federal Reserve held its March FOMC meeting and press conference and also released an updated set of economic projections.

The Fed left the fed funds rate on hold at 5.25% – 5.5%, but its updated “dot plot” still pointed to three rate cuts in 2024. The FOMC also sees the fed funds rate gradually heading to around 3.1% by 2026, indicating that this year is likely the start of a multiyear rate-cutting cycle.

For the first time in 2024, the S&P 500, the NASDAQ, and the Dow each posted a weekly total return of 2% or more. That uniform progress pushed each index to a new record high and marked a shift from the modest declines recorded in the previous two weeks. An index that tracks investors’ expectations of short-term U.S. stock market volatility fell to its lowest level in more than six weeks. The CBOE Volatility Index fell about 9% for the week; relative to a recent intraday high on March 11, the VIX was down 18%.

Overall, markets welcomed the more dovish messaging coming out of the Fed and Chair Jerome Powell. Markets reached new highs, and bond markets moved higher as treasury yields softened last week. The more cyclical parts of the market, including small-cap and mid-cap stocks and sectors like industrials and financials, were among the top-performing for the week. The better economic outlook and potential for lower interest rates may be longer-term catalysts for a broadening of market leadership.

Broadening market participation beyond mega-cap technology is a welcome sign of a healthy market dynamic. As the potential catalysts of Fed rate cuts, some easing in inflation, and better and broader earnings growth this year unfold, I see the theme of broadening market leadership possibly continuing to play out.

Technically, however, the market’s underlying breadth appears to be rather light and narrower recently in the face of new highs. This non-confirmation or weakening of strength by the underlying technicals often occurs as the markets stretch to new highs, but it can be a sign of a tired market and possibly approaching highs. However, price is king, and the markets can and often do surge much higher than most think. This invites shorting and or hedging, but coming too early can result in a possible squeeze of those shorts. That can fuel the advance even further to even more overbought conditions.

My advice in these instances is “Never stand in front of a runway freight train” The period just ahead will likely produce increased volatility as the bulls and bears vie for positioning for the next phase of the markets. There will be plenty of opportunities to go short and /or hedge your positions in the coming days and weeks ahead when the patterns and technicals tell us to do so.

And remember, trade what you SEE not what you think!

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The major U.S. stock indexes slipped for the second week in a row, as the market’s strong daily gain on Tuesday was offset by declines later in the week.

The recent two-week retreat was in contrast with the four-month rally that preceded it—a period when the S&P 500 rose 16 out of 18 weeks.

Last week growth stocks lagged and small caps outperformed large caps, while mega-cap tech shares lagged due in part to a decline in Apple following reports about slowing iPhone sales in China. The Russell 2000 Index gained 0.3% (+3.0% YTD). The technology-heavy Nasdaq Composite declined -1.1% (+7.3% YTD).

Amid tightening oil supplies, the price of U.S. crude rose around 4% for the week, reaching a peak of around $81.60 per barrel on Thursday afternoon. Although the price slipped to around $81.00 on Friday, oil remained near its highest level in more than four months.

A week after hitting a record high, the price of the most widely traded cryptocurrency, Bitcoin, pushed even higher, eclipsing $73,000 on Wednesday. However, Bitcoin’s price pulled back later in the week, and it was trading around $68,000 on Friday, close to where it ended the previous week. Year to date, the cryptocurrency was up more than 60%.

The bull market has extended to more new all-time highs on many indices, with the mood brightening into what is looking increasingly like full-blown optimism.

Stocks are now up more than 30% over the last 12 months and more than 40% from the 2022 bear market low. Since last spring’s dip, we’ve experienced only one notable phase of volatility, with equities seeing a 10% correction from August through October. The S&P 500 hit a new record high last week as stocks have ridden a wave of enthusiasm around technology, economic growth, and approaching rate cuts.

With positive Fed rate cut expectations in the months ahead, the underpinnings of the bull market may have strengthened. Also, corporate earnings are on the rise and should provide support for further gains. Although the majority of last year’s strong stock market return was attributed to a small number of mega-cap tech names, market leadership is also showing signs of broadening out, a healthy trend that we expect
might continue this year.

However, the stock market’s recent sharp run higher, combined with glimmers of what I’d describe as complacency, does make this market susceptible to heightened
volatility and knee-jerk reactions in response to any disappointing data or headlines.

This is no time to be complacent and, as a result, I am calling for heightened vigilance by paying close attention to internal market technicals. You will likely need to maintain a much more protective stance in the days and weeks ahead.

And remember, trade what you SEE not what you think!

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The past week saw the indices stretch their rallies to more new all-time highs on the S&P 500 & Nasdaq indices.

Gold and Bitcoin also tagged new highs as well. International markets in Germany, India, Japan, and Australia also reached new all-time highs.

However, in the U.S., after extending the gains for most of the week, Friday saw distinct intraday sharp reversals lower. The NDX & SPX experienced engulfing reversal bars that often mark important highs. Was it just pre-weekend profit taking, computerized trading programs/algorithms? We’ll have to see next week if they get downside extensions to confirm that an important top may have been made.

While breadth during this rally has expanded somewhat, market direction remains largely at the whim of big tech. That was once again the case this past week. Apple endured a 7-day losing streak before closing higher on Friday, while Nvidia pushed higher despite some volatility during the week and a big negative reversal on Friday. Nvidia—which has added roughly $1 trillion in market cap in 2024 alone—is now one of the world’s largest companies. Now a distinct market leader it is likely quite a bit ahead of itself and could lead the indices lower on at least a retracement/ retest

At the end of the week, the key indices, Nasdaq (-1.2%) & S&P 500 (-.03%) actually finished with weekly losses. Still, the S&P 500 remains near all-time highs and is still up nearly 25% since late October without a 5% or more pullback. Equity markets may be due for a period of consolidation or pullback, although I do not see a deep or prolonged correction or bear market (a 20% or more pullback) just yet.

As to market direction just ahead, I’ll need to see more technical evidence, such as poor technical breadth on any subsequent rallies and/or the failure of the indices to take out significant resistance when rallies do occur. Those are the kinds of technical clues as evidence of a weaker trend that may need to extend to test even lower levels.

And remember, trade what you SEE not what you think!

By HARRY BOXER

Veteran Trader, Expert Technical Market Analyst & Founder of TheTechTrader.com

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