The financial markets experienced a notable correction last week, fueled by renewed inflation concerns arising from a stronger-than-anticipated jobs report. The report, which revealed a 256,000 increase in jobs against a market expectation of 155,000, triggered a surge in the 10-year Treasury Note yield. This yield spike diminished market expectations for an interest rate cut in March, as reflected in a decline in the CME FedWatch tool’s probability from 41% to 25%. The upward trajectory of bond yields aligns with positive signals observed in the Moving Average Convergence Divergence Histogram (MACD-His) during the first half of December. This interconnectedness between employment data, bond yields, and market sentiment underscores the intricate dynamics driving market movements.
Analyzing the 10-year T-Note yield reveals a dynamic interplay between rising and falling trends. In early November, technical indicators hinted at a potential peak in the yield’s momentum. The MACD-His formed a negative divergence before turning negative, suggesting a possible reversal. Consequently, the yield retraced from a high of 4.505% to a low of 4.126%, finding support. However, a sharp reversal occurred just days later, pushing yields back above the daily starc+ band and into overbought territory. This swift swing highlights the volatility inherent in the bond market and suggests a potential pause or correction in the yield rally. The possibility of a negative divergence forming in the MACD-His further reinforces this outlook.
Market breadth, as measured by advance/decline lines, provides valuable insights into overall market health. A historical review reveals a divergence between the decline in the S&P 500 and the advance/decline lines starting in June 2024. This divergence set the stage for breakouts in the S&P 500 and NYSE All A/D lines in August, signaling underlying strength. Subsequent pullbacks, such as the one in early September, were followed by renewed breakouts, reaffirming the positive trend. However, a shift occurred in December when all three A/D lines transitioned into a corrective mode, dropping below their Exponential Moving Averages (EMAs). This shift coincided with the bottoming and subsequent rise of the 10-year T-Note yield, suggesting a potential link between rising yields and weakening market breadth.
The current market landscape presents a mixed picture with key indices hovering around crucial support levels. The Spyder Trust (SPY) is trading near its 20-week EMA and the July high, with the weekly starc- band providing a lower support level. While Wall Street’s year-end S&P 500 targets for 2023 and 2024 proved too low, the 2025 target suggests considerable upside potential. The weekly S&P 500 Advance/Decline Line, a crucial indicator of market breadth, is in a short-term downtrend, with support situated at the early September low.
The Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100 index, is also navigating a critical juncture. While currently holding above its rising 20-week EMA, it recently tested its July high. Further support levels are identified in the $494-$496 area and the weekly starc- band. The Nasdaq 100 A/D line is approaching support, but the relative performance of QQQ against the S&P 500 remains positive, suggesting continued leadership from the technology-heavy index. This divergence between price action and market breadth warrants close monitoring.
Sector performance reveals broad-based weakness with the Real Estate (XLRE) and Technology (XLK) sectors leading the decline. Only a few sectors, including Energy (XLE), Utilities (XLU), Healthcare (XLV), and Technology (XLK), have outperformed the SPY over the past month. Analysis of a broader ETF watchlist shows a significant decline in the number of ETFs trading above their quarterly pivots, indicating deteriorating market breadth. Within the sector landscape, Healthcare (XLV) shows some promising signs, while Technology (XLK) exhibits further weakness, breaking below its 20-week EMA. The relative performance and On-Balance Volume (OBV) for XLK also exhibit concerning signs, hinting at potential further downside.
