US Equities

Each month, we start our journey from the top, looking at the market from 30,000 feet up and focusing only on the biggest indexes. In just a handful of charts, we can see exactly the type of investment environment we’re in. Are stock prices rising or are they falling? Should we be erring on the side of buying or selling stocks?

Last month, our view was that stocks had made significant progress toward ending the bear market that began in 2022. Here’s how we put it:

We aren’t out of the woods yet, but we think we see the light at the edge of the forest.

The beauty of technical analysis is that prices offer us clear risk levels – we know exactly where we’re right and where we’re wrong. We entered the month with a clear view of what we needed to keep an eye on:

Small Caps are the ones to watch. With the last few days of gains, the Russell 2000 is above its own key area of resistance. That’s a good sign – small caps were the first to find a bottom last year and could very well lead us higher in 2023. But if IWM is back below 190, expect the rest of the major US indexes to be failing, too.

Well, the IWM fell back below 190. And the rest of the major indexes fell, too.

(Editor’s note: If you’re having trouble seeing any chart in this report, click on it to view a larger version)

We still aren’t out of the woods.

For months, we’ve been talking about resistance near 4100 for the S&P 500. That was our line in the sand – if prices were above that, we wanted to be buying stocks. If they weren’t, we believed a cautious approach was more appropriate.

Nothing changed during February. Stocks failed once again at 4100, and the bears still have the upper hand.

It’s the exact same situation for the NASDAQ. The level here is 12000.

These aren’t just numbers we’re pulling out of a hat. 12000 is the 161.8% Fibonacci retracement from the entire COVID selloff. The market respects these Fib levels, so we do, too.

But it’s not just weird rabbit math that has us watching that level. It’s also where growth stocks peaked relative to value. In September 2020, growth stocks ended a near 15-year run of outperformance. The NASDAQ, which is dominated by those same growth names, is paying attention.

There’s no reason to be aggressively buying stocks as long as we’re below those key levels. We know exactly where we want to be more bullish. So what would it take for us to shift from neutral to outright bearish on US stocks?

We’d need to see more indexes acting like the Dow.

The Dow Jones Industrial Average did more than just fail at overhead supply during February: it ended the month by breaking its December lows. This chart is the biggest threat to the bull case for stocks. If the index that’s been the leader for more than a year is now setting new lows, how can we be buying stocks?

The Dow needs to get back above 33000 in a hurry. If it does, that failed breakdown could be the catalyst that sends prices through that tough overhead resistance near 34500. The longer we’re below 33000, though, the more likely it is that stock prices overall will retest their October lows.

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US Equities

We start our monthly technical outlooks at the top for a reason. In just a handful of charts, we can see exactly the type of investment environment we’re in. Are stock prices rising or are they falling? Should we be erring on the side of buying or selling stocks?

Last month, we had this to say about the world’s most important stock index:

The S&P 500, a market cap-weighted index comprised of 500 of the biggest companies in the United States, is stuck below a falling 200-day moving average. At best, prices are stuck in a sideways trend. The line in the sand for the SPX is 4100. That’s the 161.8% Fibonacci retracement from the entire COVID selloff, and that’s been overhead resistance since May. If we’re above that, we’ll be looking for stocks to buy. As long as we’re below it, we need to err towards caution.

Since then, the index has surpassed its 200-day. That’s one point for the bulls. But we haven’t surpassed the resistance area near 4100. The bears have the upper hand unless and until that level is taken out.

(Editor’s note: If you’re having trouble seeing any chart in this report, click on it to view a larger version)

We’re watching closely, because a few more days like the last would quickly push us above it and give us confidence to flip from a neutral stance to one that’s more bullish overall. Remember, our goal is not to nail tops or bottoms, but to catch the middles of big trends. IF this is truly the start of a new, multi-year bull market, we can afford to wait for that confirmation.

It’s the exact same situation for the Dow and the Nasdaq. The Dow Jones Industrial Average has so far been unable to absorb all this overhead supply between 34000 and 35000. It wouldn’t take much to get a breakout, but this editor is from Missouri. It’s gotta show me.

The level for the NASDAQ is 12000. That’s the 161.8% retracement from the 2020 selloff and the September 2020 peak, which marked the beginning of a regime shift as value stocks took the lead from growth. If the NASDAQ is above 12000, we can confidently be buying stocks.

Small Caps are the ones to watch. With the last few days of gains, the Russell 2000 is above its own key area of resistance. That’s a good sign – small caps were the first to find a bottom last year and could very well lead us higher in 2023. But if IWM is back below 190, expect the rest of the major US indexes to be failing, too.

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