S&P 500: January
A New Year In A Familiar Spot
A Familiar Location
In terms of market sentiment and exposure to U.S. equities, the year begins in a position similar to April and August of last year—periods that marked the end of brief corrective declines. The chart below highlights this relationship, annotated with sentiment data from the CNN Fear & Greed Index and positioning metrics from the NAAIM Index, which reflects the average equity market exposure reported by its members.
With similar sentiment and positioning to the correction lows of last year— should we anticipate more of the same at this point?
Risk Off Criteria - 2/3
Three components in my market analysis define the market as either risk-on or risk-off. At the close of trading January 3, two of three risk criteria remained active.
The Short Term Trend— price relative to the 20-day exponential moving average
Breadth— the number of stocks making new highs vs new lows across NYSE & Nasdaq markets, middle panel “Net New Highs”
Momentum— measured using the Percentage Price Oscillator, lower panel
The S&P 500 closed just below its short term moving average (20-day exponential), breadth ended the week positive (barely!), and momentum continues to point downward.
Caution remains warranted into next week— however, closing prices 5960 would likely fend off an immediate continuation of the corrective move that started at the beginning of December.
Navigating The Short Term
The S&P 500’s price relative to the short-term trend continues to be a key factor in near-term market navigation. Last week’s chart included the note: “risk is elevated if the moving average acts as resistance”—a thought that remains relevant heading into next week.
Currently, the S&P 500 is trading just below the moving average. From a bearish perspective, a rejection or failure to sustain above this level would heighten downside risk and, in my view, make the 5650–5750 range a more plausible target for a low. Conversely, if the price sustains above the moving average, the melt-up narrative takes the spotlight.
Key levels into next Sunday letter:
6000 — Recapturing & sustaining 6000 will erase bearishness and return the favor to bull participants
5960* — short term moving average, risk becomes elevated if the moving average acts as resistance followed by a failure to maintain the next level of support (5875)
5875 — represents a previous all time high range, and now a critical support level. Failure to sustain 5875 opens the index for further decline towards 5767 and 5650
5765 — late September all-time high range + consolidation range prior to next series breakout— the immediate support level if the index closes below 5875
5650 — low range of consolidation
Small Caps & “The Melt-Up”
The small cap category continues to maintain a good structure in the charts, and in the scenario of a broader market decline the small cap equity barometers are likely to avoid the red market paintbrush— however, this category has room to fall and maintain chart integrity.
ARK Innovation ETF
ARKK maintains a healthy breakout structure above 52— I continue to remind myself, this is a three year breakout in the making. The medium duration moving average (50-day exponential) is the key level to monitor as it has historically provided support during sustained advances. The moving average did exactly that last week.
IWM - Russell 2000 ETF
No changes to IWM context from last week
The traditional small cap category, the Russell 2000 remains in a state of wide consolidation just below the all time high breakout level.
Bonds
No changes to bond context from last week
The 20-year Treasury Bond (TLT) remains below the key $100 level, and has now trended towards the yearly lows established earlier in April. As a general guideline for the current market, I view a move above $100 as a potential signal for growing risk-off sentiment in U.S. equities. I like bond positioning here as a defensive posture.
Summary Outlook
My market outlook and the conditions for each scenario remain unchanged. The bullish scenario is on hold until the risk-off criteria subside, ideally with the S&P 500 reclaiming the 6000 level. Starting the week of January 6 I remain with my long exposure hedged with a short S&P 500 trade— closing prices above 6000 will remove the hedge.
I continue to speculate that in a melt-up scenario, small-cap equities—particularly ARKK—will outperform.
In the bullish scenario: position overweight long in small cap equities, namely ARKK. Signals for this scenario are the absence of “risk off criteria” in the broader market and a breakout in ARKK and IWM trading above 52 and 212, respectively.
Updates: ARKK positioning remains long, key level to sustain above is 56
Updates: Long exposure hedged with Short S&P 500, hedged to be removed > 6000
In the bearish scenario: position short the S&P 500, and long bonds. Signals for this scenario is when all three risk-off criteria are simultaneously triggered— and long bonds becomes favored when TLT (iShares 20+ Year Treasury Bond ETF) trades above 100.
Heading into the week of the January 6, 2025 caution remains warranted with all 2/3 risk-off signals active.
Disclaimer: The information in this article is for informational purposes only and should not be considered financial advice or a recommendation for any investment. I am not a financial advisor, and the content is not intended to serve as financial advice. It is solely intended to journal thought, ignite more thought and discussion.