I took last week off, and I’m feeling pretty bad due to a virus this week, so this may be a bit shorter than usual.

Last week, the S&P 500 rose as systematic funds started buying again after the index crossed some key levels. These funds are quantitative in nature and respond to movements in the index based on levels or moving averages, with no fundamental analysis. This makes them a dangerous group as they can move the market given their size, and they can also flip the other way quite quickly.

S&P 500 (SPY)

However, there were some other factors from the technical side of things worth reviewing here. First, volume in the S&P 500 futures has been declining steadily since the March 13 short-term low, with the levels seen over the past week similar to those witnessed during the December holiday season. This is concerning because systematic buying is pushing the market higher on light volume.

Additionally, the structure of the rally is very steep and has a pattern more similar to an index that is attempting to fill a gap after a sharp breakdown. This pattern could result in the index completing around 4,150 on the S&P 500 cash index, allowing it to retrace to the broken green trendline that it has previously fallen below on two occasions.

The S&P 500 also traded above the upper Bollinger Band, which suggests that the index is close to either pausing and consolidating sideways or due to be pulling back to the lower Bollinger Band.

Nasdaq (NDX)

The bigger problem lies in the Nasdaq, however, as the cumulative number of stocks making new highs minus new lows is still making lower lows. In 2018 and 2020, this cumulative value stopped making new lows and moved sideways as the index turned higher off the bottom. This cumulative chart has helped me a lot in determining the direction of the market, and it suggests that the next leg lower is still to come.

Tech and Financials

I think what we’ve seen over the last week or two has been driven by systematic trading and rebalancing of portfolios, as investors have sold financials, for obvious reasons, and moved into mega-cap technology names. This is most noticeable in the XLK to XLF ratio, which has recently risen very quickly.

Rates

Some of this could also be a knee-jerk reaction to the idea that the Fed is going to start cutting rates, but I think that is unlikely to happen unless something changes dramatically in the economic landscape. In fact, I would tend to think that rates are likely to rebound from here a bit, at least based on the potential triple-top pattern that is now present in the TLT, sending the the ETF lower and yields upwards.

Biotech (XBI)

Additionally, long-term duration growth sectors like biotech, which require a lot of capital, have not participated in this recent rally.

ARK Innovation ETF (ARKK)

Even the ARKK ETF hasn’t participated in the recent rally, as it has been basically trading sideways since late February.

A Repeat of 2022

So maybe there is some more room for the indexes to rise this week as the CTA’s finish up their buying. But I guess that with the end-of-quarter window dressing over, the rally is likely to stall before the end of this week. On top of that, we saw the same thing happen last year, starting on Tuesday, March 15, 2022, as we saw beginning on Tuesday, March 14, 2023.

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