The major U.S. stock indices - Nasdaq 100, S&P 500, and Dow Jones - have all been in strong uptrends over the past year but are showing signs of potentially topping out and correcting in the near-term.
Key technical levels to watch this week:
Nasdaq 100:
Resistance at 16,765 (all-time high), 16,450, 16,000
Support at 15,675, 15,350, 14,875, 14,450
S&P 500:
Resistance at 5,400, 5,275
Support at 5,100, 5,000, 4,900, 4,800
Dow Jones Industrial Average:
Resistance at 61.50, 60.00, 59.00
Support at 57.50, 56.00, 55.00, 54.00
The Nasdaq 100, heavily weighted in technology stocks, has led the rally but is now the most extended and vulnerable to a pullback. It is trading well above its 50-day moving average which often acts as support on corrections. The S&P 500 and Dow are closer to their 50-day averages and may hold up better.
Market sentiment has become quite greedy and bullish according to Fear & Greed Index at 65 Greed. This is often seen near short-term tops. However, the longer-term outlook is still positive with the Pre-Month indicator at 48 Neutral.
Treasury yields have spiked higher recently with the 10-year yield jumping to 5.13%, its highest level since 2007. Rising rates could pressure richly-valued growth stocks in the Nasdaq. However, the upward-sloping yield curve (10yr-2yr spread) suggests recession risk remains low.
Positive sentiment. But for how much longer?
Earnings season is winding down, with over 90% of S&P 500 companies having reported Q1 results. While earnings have generally surpassed lowered expectations, management commentary has turned more cautious, citing headwinds from higher interest rates, stubborn inflation, and a slowing economy. Mega-cap technology leaders like Apple, Microsoft, Amazon and NVIDIA are holding up well, but economically-sensitive sectors are showing some cracks.
Volatility (VIX) has ticked up from very low levels but remains in a downtrend overall, indicating limited market fear or hedging. It may need to spike above 30 to signal a tradable bottom if stocks do correct.
In terms of market internals, the NYSE advance-decline line has diverged negatively from the S&P 500, not confirming the recent highs. This is a near-term cautionary signal. Overall breadth and participation remains healthy though.
Sector-wise, Technology and Communication Services stocks look the most overbought, while defensive sectors like Utilities, Consumer Staples and Healthcare have been lagging. Energy remains a leadership area. Investors should watch for rotation and rebalancing.
The top weighted stocks will be important to watch. Many have had huge runs and could be due for a breather. However, ongoing strength could keep the indices afloat.
Dividends:
Earnings:
Earnings season is winding down but there are still some key reports this week including Nvidia, Costco, Marvell, Workday and Dollar General. Reactions to results and guidance could spur volatility in individual names and sectors.
On the macro front, PCE inflation data on Friday will be in focus given the Fed's hawkish posture. Hotter than expected inflation could weigh on sentiment. Durable Goods and manufacturing PMI data will give a read on economic growth and demand.
Geopolitically, U.S.-China tensions have escalated with tit-for-tat sanctions around the shooting down of the Chinese spy balloon. However, markets have largely shrugged this off so far. Investors are also monitoring the Russia-Ukraine war and debt ceiling negotiations in Washington.
While the long-term trend remains bullish, there are signs the rally is getting stretched and the market is ripe for a pullback. However, corrections have been shallow and short-lived in this bull market. Dip buyers may step in quickly if we do see a sell-off.
Key levels to watch on the downside are the 50-day moving averages and the early February lows:
Nasdaq 100: 18,000
S&P 500: 5000
Dow: 54,000
A decisive break below those levels could open the door to a deeper 10-15% correction. However, barring a major macro shock or sharp earnings downturn, the path of least resistance still seems higher over the coming months. Investors should remain balanced and nimble.
On the sector front, I favor Healthcare, Consumer Staples, and Quality Technology, while avoiding deep cyclicals, Financials, and speculative growth stocks. An uptick in volatility also seems likely, so focusing on strong balance sheets, pricing power, and consistent cash flows is prudent.
In terms of specific stocks, names that screen well based on a combination of momentum, valuation and earnings stability include: UnitedHealth, PepsiCo, Costco, Broadcom, Texas Instruments, Waste Management, and Lockheed Martin.
High-flying AI names like Nvidia are getting overextended, while crypto-related stocks seem to be driven more by speculation than fundamentals at this point. The EV space is also frothy, with many pre-revenue companies sporting huge valuations. Tread carefully in these areas.
Remember what goes up must come down (eventually)
Stay safe and trade wisely and this is in no mean financial advice.
Harry
