Stocks ended mostly higher over the holiday-shortened week and were heavily focused on growth stocks. Information technology stocks outperformed, helped by a strong rally in semiconductor shares. For the second week in a row, money flowed into the technology sector, lifting both investor sentiment and overall price levels in the other indices. Artificial intelligence (AI) chip giant NVIDIA was particularly strong, as was rival Advanced Micro Devices (AMD).
Treasury yields pushed up towards fresh one-month highs and yet the S&P 500 is at new all-time highs, which would suggest stocks can move higher with yields. Only time will tell whether or not stocks can continue to push higher in the face of potentially higher than expected yields and a less accommodative Fed, as expectations for rate cuts in 2024 fell sharply over the week. Futures markets were pricing only a 13.1% chance of seven or more rate cuts in 2024 as of the close of trading on Friday versus 61.5% the week before, according to the CME FedWatch Tool. The chances of a rate cut in March fell from 81.0% to 47.4%. The decline appeared due in part to comments Tuesday by Fed Governor Christopher Waller, who told a virtual conference that “I see no reason to move as quickly or cut as rapidly as in the past” given the healthy state of the economy.
The S&P 500 finished the week near 4640, a new all-time closing high (prior all-time closing high is 4,796). New all-time highs are a bullish indicator. Why? First, you’re in fresh, bullish price discovery mode, which suggests improving underlying fundamentals that justify higher prices. Next, when a stock, ETF, or index hits a new all-time high, this can prompt additional buying, both from sidelined investors and from short-covering. Yes, the SPX is being pulled higher primarily from the strength in technology, but price is king in the land of technical analysis. Ideally, the bulls would want market breath to rise along with the price but near-term, it appears that the path of least resistance is higher.
However, one important word of caution: On a week-over-week basis market breadth has lost ground, which suggests a narrowing in market leadership. That kind of narrow market breadth usually suggests a market that may be getting tired or “long in the tooth” and can be a precursor to an impending top in equities. Market breadth attempts to capture individual stock participation within an overall index, which can help convey the underlying strength or weakness of a move or trend. Typically, broader participation suggests healthy investor sentiment and supportive technicals. That doesn’t appear to be the case right now
Next week should be a very important one in determining where the markets may be headed going forward but despite the expression” The trend is your friend” I want to re-emphasize that despite the market’s apparent momentum the markets are extended in 5th wave moves for the SPX & NDX and are quite vulnerable to a market pullback or retracement This is no time to be casual or cocky.
Pay close attention to your technicals this coming week.
And remember, Trade what you see, not what you think!
