Our View
The day was dominated by tech. At the low, the ES was down 0.42% from the prior settlement, while the Nasdaq futures (NQ) were down 356 points or 2.16%.
10-year rates soared higher on Monday, which is odd that growth and tech stocks ignored this move. We mentioned it in yesterday’s Opening Print and while the market didn’t seem to care on Monday, it sure did on Tuesday!
As rates have risen, bonds have been getting killed. Goldman Sachs said that “The sell-off is likely maturing in Europe & the UK. Start taking profit and accumulate length with a medium-term perspective.”
I don’t know where that leaves us with U.S. Treasuries yet, but we’ll have some technical analysis on that below.
Our Lean
From Jeff Hirsch at the Trader’s Almanac:
“After the best first-day gain since 2000-2001, S&P 500 held its ground and finished the current seven-day trading span defined by the Santa Claus Rally with a 1.4% gain. Including this year, Santa has paid Wall Street a visit 58 times since 1950.
Of the previous 57 occasions, January’s First Five Days (FFD) and the January Barometer (JB) were both up 31 times. When all three indicators were positive, the full year was positive 28 times (90.3% of the time) with an average gain of 17.5% in all years.”
So far, we have the seasonalities working in the bulls’ favor, but it’s not a done deal by any means. Especially with the way tech is behaving.
I am still watching for the ES to push higher, but it needs this weight removed — tech — to be able to push meaningfully higher.
Lately, the pattern has been to sell the morning strength and buy the afternoon weakness. Let’s see if they keep it the same today.
Daily Recap
The ES opened at 4801, raced to a high of 4808.25 — less than 1 point above the Globex high — and reversed lower. It dipped back down to 4796, then rallied back to a lower high of 4806 and fell hard an hour after the open.
The S&P futures tumbled down to 4773, bouncing hard off this area twice between 11 and 11:30, before rallying to 4788.50. The rally was met by a little back-and-fill down to 4779.50, before the rally to 4788.25 — another lower high — failed to attract enough buyers.
At this point — roughly noon ET — the ES was approximately flat with its prior close, but the same cannot be said for the NQ. At the same time, the NQ was down 285 points or 1.75% and the lows weren’t even in yet.
The ES ultimately bottomed at 4764.50 around 1:45, just in time for the 2:00 pm turnaround.
From there, it ripped off seven straight 15-minute gains, rallying back to a high of 4795 going into 3:50. The MIM showed almost $1 billion to buy coming into the final 10 minutes, but at 3:50, it jumped to $2.74 billion to buy, helping the ES pop to 4798.25.
However, it reversed hard and closed the 4:00 cash session at 4783.75 and settled at the same price an hour later on the 5:00 pm futures close, down less than 1 point from the prior session.
In the End
In the end, it was all about tech. While the ES closed about flat on the day, the NQ fell more than 1.25% even after a decent bounce off the lows. In terms of the ES’s overall tone, it was weak through the first half of the day and strong through the second half. In terms of the ES’s overall trade, volume was steady at 1.38 million contracts.
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Technical Breakdown
- NYSE Breadth: 63.7% upside volume
- NASDAQ Breadth: 44.5% upside volume
Given how nasty of a day it was in tech, I’m surprised the Nasdaq breadth wasn’t worse. The NQ futures opened at 16509.75 and rallied less than three points to its regular-hours high and then flushed lower, bottoming almost 400 points lower.
All the while, the ES and SPY were only mildly harmed at the session low and closed near flat on the day.
It was an impressive day for the broader market and far less impressive from tech. However, given the latter’s influence on the overall market, we will need some stability in tech to unleash more upside in the S&P 500.
That reminds me: I keep hearing so many investors say that “FAANG is propping up the market.” Is that true, though?
Apple is fresh off all-time highs after hitting its $3 trillion valuation. That surely is doing some propping, and although impressive, it’s about 7% off the S&P 500’s total market cap of ~$42.5 billion.
Alphabet is about 4% off its high, which is also okay. Same with Microsoft MSFT, for what it’s worth. But the rest of FAANG — “FAN” — is down double-digits from its high, (so is NVDA, the 8th largest company by market cap). Tesla was down about 10% from its high at yesterday’s low.
Anyway, it’s just some food for thought. It’s not like FAANG+MNT are all sitting at new highs.
Game Plan
The Game Plan is pretty straightforward: Keep an eye on tech/rates.
Relief in these two areas should spell relief for the whole market. However, more pain could eventually tug the overall market lower.
S&P 500
We’re looking at the S&P 500 futures, but as always, you can extrapolate the layout to the S&P 500 index or the SPY.
It continues to hold its short-term moving averages and its prior breakout level over 4740. As long as those remain true, it’s hard to be too bearish. That said, we need a sustainable push over 4800 in order to get more momentum going on the long side.
So far, it just hasn’t been there.
Nasdaq
Can tech lend a hand? I don’t like to say there’s a “line in the sand,” but it feels that way with how the NQ futures and the QQQ bounced from the 50-day moving average on Tuesday.
A break of yesterday’s low that’s not quickly reclaimed opens the door for more selling pressure.
The question is, how much selling pressure in the Nasdaq can the overall market tolerate?
I would love to see the NQ back above 16,450 and for the QQQ to get back above the $400 to $401 level.
10-Year Rates
Here’s the real doozy: Interest Rates.
Yesterday, the TNX was rejected from the 1.69 to 1.70 area, which was stiff resistance in 2021, particularly in Q4.
A fade from here could (and should) bode well for rate-sensitive assets and tech stocks.
A breakout would certainly be something to watch, although the 1.76 to 1.80 area has several potential hurdles, including the declining 200-week moving average and the prior 2021 high.
Let’s see if it continues to fade from here.
Individual Stocks — AVGO, F,
The individual setups are hit and miss in this tape right now. That has me a bit more defensive with a bit smaller size until we can get a more clear picture.
Two names catching my eye are AVGO and Ford.
AVGO
In yesterday’s Game Plan, we flagged AVGO as a potential reset trade and that’s exactly what we got.
From here, let’s see if we can get a daily-up rotation over $672.25, putting the $675 to $677 area in play next.
*A quick note on this one: If you go back through yesterday’s action, AVGO was holding up pretty good despite the puke job in the Nasdaq. Then it was one of the first to bounce and go green. Keep that in mind going forward (finding relative strength in a weak tape). I’m glad we had it on our watchlist.
Ford
I’m not sure how many people took the setup in Ford, but I know there are a few so I will update it.
On 12/27, I laid out the case for a breakout over $20.50, saying that a move over $20.50 opens the door to $21.25, then to $23 (a key extension level).
After absolutely ripping through $23, the $25 to $25.50 area could be in play for some runners. Kudos to those who are long.
Disclaimer: Charts and analyses are for discussion and education purposes only. I am not a financial advisor, do not give financial advice, and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck!
Economic Outlook
ADP report crushed expectations. Will the NFP report do the same thing on Friday morning?
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