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Stocks sold off again on Friday capping off a very choppy week for the market. The Dow dropped 191-points and a tough day for large cap tech pulled down the Nasdaq and S&P 500. The small caps of the S-fund led with just a minor loss on the day, but for the week it was the small caps that lagged as rising yields has put some pressure on the smaller companies. The I-fund continues to lead for the month of March.

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It was an interesting day on Friday and the recent action and set up in the market has been fascinating to me. Small caps are feeding off of yields which were falling then rising as investors try to figure out what the Fed might be doing with interest rates, which impact small caps most. But despite the rising yields and the steep losses in the large cap indices on Friday, the internals told a different story.

There were more stocks up than down on both the NYSE and the Nasdaq on Friday, and the trading volume was also positive. The NYSE had a healthy 106 new highs, but the Nasdaq saw many more new lows than new highs.




This is the Nasdaq 100 chart which are the largest tech stocks in the Nasdaq Composite. This top 100 chart looks very similar to the Nasdaq Composite chart and there were 140 new lows made in that index on Friday despite the Nasdaq being just a few days off its all time high. That may be concerning but the chart has a few lines in the sand that it will be dealing with as we start the new week. The 30-day EMA has been holding firmly all year, but that large open gap that needs filling, is over 300-points below the average. It looks like it is trying to do some consolidating, which wouldn't be a bad thing at these heights.



The small caps of the S-fund are also trying to hold onto that 30-day average, and there is a small open gap below that, but this chart has done a lot of its consolidating already as it trades just barely above where it was back on December 28. If this can hold it may have some legs to run higher.

The question I have been repeatedly asking is whether small caps can finally make a move while the overly extended large caps do some much needed consolidating? The answer may be -- it depends which way yields are moving and with the FOMC meeting this week, we could get some answers.

The 10-year Treasury Yield has spiked up recently after the hotter than expected CPI and PPI reports last week. There could be some resistance just above 4.3%, but that is starting to look like an inverted head and shoulders pattern in a rising channel. If that plays out the way it is "supposed to", we could see a right shoulder form, but the inverted H&S patterns tend to eventually break to the upside. Is that telling us that the Fed won't be cutting rates at their June meeting as most expect?




The Fed increased their balance sheet last week. It's been a while since they've done that and as I talked about before when they last increased it, stocks did pretty well the following week, so perhaps there is a breeze at the back of the market this week, even though historically the week after quadruple expiration week has a bearish bias. One reason it could bounce is because stocks actually have a bullish bias during the expiration week, and of course stocks were down last week, so it could just be a reversal.




The weekly chart of the S&P 500 shows just how extended it has become. For the first time all year however the S&P did not make a higher high over the previous week on this weekly chart. If and when we do get a meaningful pullback, the previous high is as good as any downside target, just as we saw last fall. Was the lower high the sign, or do we have some time before perhaps the typical "sell in May and go away" weaker seasonal period kicks in?




There is an FOMC meeting this week and a decision on interest rates will be released on Wednesday afternoon. No one is expecting a rate cut at this meeting, but clues to when the move in rates will be will move the market.

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The S&P 500 (C-fund) has been moving sideways this month but so far there has been no breakdowns in the chart. The 15-day EMA has been holding firmly on this for months. The open gap below 5000 is a concern, so the rising channel just below the 15-day EMA is going to be tested this week as the index slides down near 5100. The PMO indicator isn't looking very good, and volume spiked because it was a quadruple witching expiration day.




We looked at this one in the top section, but here's a closer look of DWCPF (S-fund) trying to hold at the 30-day EMA again. The December high could provide support if the 30-day EMA fails.




EFA (I-fund) fell out of its rising trading channel last week and there is some room below before filling in the first open gap near 78.20, and then the 20-day EMA, which hasn't been a major factor on this chart, is down by 78. 77.50 could provide some support if this pullback gets more serious.




BND (Bonds / F-fund) was down slightly on Friday as yields continued to rise after the CPI and PPI reports. There's some support in the area, and a large open gap up by 72.50.




Thanks so much for reading! We'll see you back here tomorrow.

Tom Crowley


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