Recent selling pressure should be nearly complete following the eight-day downdraft since 2/19. Short-term momentum has gotten oversold, and many key large-cap Tech stocks look to be in/near support. Furthermore, Treasury yields and the US Dollar have been breaking down sharply, and I don’t see the correlation between Treasuries and Equities reversing anytime soon. Moreover, sentiment has continued to grow more and more negative, given the constant rhetoric regarding tariff uncertainty, and the larger intermediate-term uptrends for SPX remain very much intact. Overall, if Tuesday’s tariff announcements are less severe than 25% for Canada and Mexico and 10% for China, as the media has announced, I suspect this will prove to be a bullish catalyst for an Equity rally. While sentiment remains negative as SPX, along with NVDA, have pulled back to test important support, I don’t see the degree of technical weakness at current levels. Risk/reward looks favorable for me, as Equities will bottom out this week and turn higher. The next 2-3 days should shed some light as to whether Equity indices can stabilize and turn back higher.
Weakness in “Tariff Tuesday” could find support as both SPX and NVDA test important support
Monday’s weakness brought the price down to a near striking distance of January lows in SPX and right near $113 in NVDA, while QQQ broke 500.
In the short run, I don’t view this market structure as being broken. While the selling pressure certainly feels bad in large-cap Technology and many parts of the Semiconductor sector, it’s important to reiterate that SPX just made new all-time highs eight trading days ago, on 2/19/25.
Sectors like Financials, REITS, Industrials, and Consumer Discretionary all showed gains of better than +0.50% in the past week heading into Monday. While the Stock market has had a bit of a defensive tone lately, sector SPDR ETFs like XLF, XLV, XLI, XLP, XLB, and XLE all outperformed SPX in the past week. This has been helpful in holding up market breadth at a time when Technology has been consolidating.
As shown below, SPX has not broken the trend from 2023 lows and remains above January 2025 mid-month lows. Thus, at a time when many feel the downside pressure has begun to accelerate, the larger trends simply don’t back that up.
I expect that SPX-5773, the mid-January lows, should hold on to further weakness into Tuesday. Moreover, QQQ likely finds strong support near 482-485 at a maximum level of selling pressure but very well could bottom near 490 if Tuesday’s tariff announcements turn out to be more innocuous than expected.
S&P 500 Index
Energy could show further weakness into mid-to-late March before attempting to stabilize
Tuesday’s OPEC announcement looks likely to lead Energy lower in the weeks to come following its recent failed bounce attempt.
While Energy ETFs like OIH and XOP have been noticeably weaker than XLE, this latter ETF finally gave way and broke down on Monday, with its close back under $88.72.
This officially looks to have violated the triangle pattern on XLE, which had been formed since the US election last November.
Pullbacks look likely down to $83-$84 before XLE finds much support. This would likely align with WTI Crude also reaching the mid-$60s, near lows seen back in Fall 2024.
At present, while there were hopes by many investors in the Energy sector trying to stabilize following the recent decline in WTI Crude, Monday’s price action in XLE indicates further selling pressure over the next couple of weeks.
Investors should exercise caution and selectivity within the Energy sector as the Fossil fuel-based Energy stocks appear less attractive than those involved with Natural Gas. As WTI Crude has slid in recent weeks, the price of Natural Gas has been advancing and will likely move to new monthly highs into late March.
The chart below highlights XLE, which should result in a March decline for Energy before this sector can stabilize.
SPDR Select Sector Fund – Energy Select Sector
Utilities being raised to technical Overweight
Utilities seem likely to gain further ground given Interest rates having begun to fall more briskly on the long end in recent weeks. As of 3/3/25, the Equal-weighted Utilities sector was the 3rd best (out of 11) performing sector on a Year-to-Date basis (YTD) returning +5.74%, which is roughly 400 basis points (b.p.) above SPX performance.
Furthermore, over the last 1-month period, Utilities proved to be the best performing Equal-weighted Sector out of all 11 sectors (RYU) with returns of +5.35%.
While I do sense that outperformance might prove temporary if yields start to turn back higher, this doesn’t seem likely over the next few months. Thus, while I expect that Equities should begin to turn higher, I also feel that Utilities can show further outperformance over the next few months, which might be led by Power generation/AI Utilities showing strength.
Overall, this strength is meaningful enough (and looks to continue long enough) that it’s worth me raising my technical rating on Utilities from a Neutral to an Overweight.
Despite this sector potentially showing some underperformance if/when SPX begins to turn higher, I feel that the bearish trend in Interest rates likely keeps Utilities outperforming as a yield-sensitive sector.
On an absolute basis, gains look likely in RYU up to $72.57-$73.79 which is an area of upside resistance for RSPU.
Invesco S&P 500 Equal Weight Utilities ETF
Materials weakness warrants this sector being lowered to Underweight
It’s always important when a sector drops to new Decade lows in relative terms, which is precisely what Materials did last month.
While precious metals stocks look to be source of strength to this sector, most other parts aren’t working too well.
This Equal-weighted ratio chart of Materials vs. SPX (RTM vs. RSP) violated lows from both 2020 as well as 2016 which looks to be a meaningful breakdown, relatively speaking.
While the Materials sector doesn’t count for much within SPX, this group should underperform further in the months ahead.
I am lowering my early 2025 Neutral rating in Materials to Underweight, expecting further technical underperformance.
RSPM/RSP
My latest Sector ETF allocations are as follows, which Tom Lee released over the weekend.
As seen here, I remain technically Overweight in Consumer Discretionary, Industrials, Technology, and Financials. However, I am technically Underweight on Energy, Materials, and Consumer Staples.
The chart below reflects the changes announced in today’s report.
