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S&P 500 followed through on Friday‘s decline, yet the strength of the intraday reversal higher begs the question of whether the buyers can stage a comeback. Market breadth lower than -1,000 for the advance-decline line suggests an uphill battle for the buyers, and so do the largely non-existent rotations of yesterday.

I‘m not looking for Powell to deliver any kind of dovish surprise – the market is likely to be disconcerted by hearing not one but two rate hikes still this year, with really no cuts. Real assets are for today erring on the side of caution, even if USD remains flat and unable to hold however modest appreciation attained. For all the fresh Treasury financing needs, there‘s no liquidity leaving the markets to support a squeeze on bulls yet. Meanwhile, markets are gladly ignoring 70% recession odds by the Fed‘s own models, and more.

Implications for stocks? Covered Sunday:

(…) The market topping process thoroughly described a week ago would come from sheer overvaluation driven by AI FOMO that has taken stocks into extreme greed territory already – from realization thereof. Perhaps characteristically, while the bullish sentiment rises, stock funds are seeing outflows to bond funds.

The current rally is built on the false notion that recession has been and would be avoided, that earnings would start to rise, and that incoming data aren‘t generally bad. Further, markets still expect the Fed to cut rates, and significantly so – disregarding and challenging Powell who said no real cuts over the next 2 years, with Fed funds rate projected at 5.6%. Yet tech still keeps doubting the yields message – and its only saving grace Friday was that volume wasn‘t considerably higher.

To me, this current sky is the limit bear market rally has the hallmarks of post dotcom bubble and even the 2008 suckers‘ rallies when it was either not universally accepted that recession was already here, or it was fiercely debated whether the worst was actually over.

While it‘s notoriously hard to time the top in euphoric upswings of current Nasdaq flavor, the bubble going from developing to having developed would give way to ridiculous overvaluations and rotation the like of which we saw Friday – away from tech and other Top 10 leaders belonging to XLC and XLY in favor of defensives (XLU, then some XLRE with perhaps XLP and select XLV components) and really undevalued resource stocks from oil stocks to precious metals and base metals miners.

Let‘s move right into the charts (all courtesy of www.stockcharts.com).
 

S&P 500 and Nasdaq Outlook

Bulls can forget about ES 4,490 – 4,510 area – there isn‘t enough sectoral breadth or looming catalyst for such a move. Even 4,448 would be a tough nut to crack – it‘s unlikely that the bearish positioning is to such an extent that it would cause a brief short squeeze. The 4,415 area certainly looks more easily attainable, and tech would lead any downswing again.

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