The 2023 stock market rally is facing its first technical challenge

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Thursday, January 26, 2023

Today’s e-newsletter is by Jared Blikre, a reporter targeted on the markets on Yahoo Finance. Follow him on Twitter @SPYJared. Read this and extra market information on the go together with the Yahoo Finance App.

Stocks mounted an impressive comeback Wednesday, with the Nasdaq Composite (^IXIC) practically erasing its largest opening deficit since October. The Dow Jones Industrial Average (^DJI) eked out a small achieve — its fourth straight — after spending many of the day within the pink.

Even Microsoft (MSFT) rallied again from a 4.6% early loss to finish the day down solely about half a %.

As we have been writing, this 12 months’s market motion has been a reversal of one among final 12 months’s most necessary tendencies, which noticed the Dow outperform the Nasdaq by the widest margin in 20 years.

This 12 months, the Nasdaq is now up 8%, considerably outperforming the Dow’s return of just below 2%.

And whereas it is unlikely a brand new bull market led by tech has begun, this relative efficiency is a tantalizing reminder of the positive factors tech bulls reaped in progress shares in the course of the ultra-low rate of interest regime that had prevailed for the reason that Global Financial Crisis.

And with a number of benchmark indexes proper now at key ranges, a squeeze out of present buying and selling ranges would seemingly generate upside momentum.

First, check out the extremely cyclical semiconductor area, the place the PHLX Semiconductor Index (^SOX) is making an attempt to interrupt out of a 9-month lengthy inverse head-and-shoulders technical formation.

A breakout larger would recommend bulls retaking management after bears dictated worth motion for many of 2022.

The PHLX Semiconductor Index is breaking the neckline of an inverse head and shoulders pattern. — The PHLX Semiconductor Index is breaking the neckline of an inverse head and shoulders sample.

If the majors observe swimsuit and handle their very own respective technical breakouts, these strikes would seemingly generate important momentum given the length of the consolidation underneath present ranges. The longer an index, stock, ETF, or every other traded asset consolidates round a selected worth degree, the stronger strikes are usually when the worth breaks larger or decrease.

For the S&P 500, the December highs round 4,100 mark the higher finish of the present vary; the index closed at 4,016 on Wednesday.

Meanwhile, Nasdaq has been constrained by 11,500 on the higher finish since September, whereas the Dow has been caught underneath 34,500 since April. These indexes closed at 11,313 and 33,743, respectively, on Wednesday.

However, it could be barely uncommon for danger markets to easily rally from right here given how stretched the Nasdaq is versus the Dow — as evidenced by the beneath chart, which dates again to the start of the pandemic.

Dow Jones Industrial Average vs. Nasdaq Composite

The Dow’s weak spot within the face of Nasdaq power this 12 months seems to have reached a short-term excessive, and is within the technique of reversing. And excessive readings have tended to coincide with short-term highs in shares for the reason that bear market acquired underneath approach final 12 months. However, in the course of the pandemic bull market of 2020-2021, these excessive readings of relative outperformance tended to do little to dent the rally.

So, if the foremost indexes do roll over from right here, tech and progress shares would seemingly unload greater than cyclical and defensive names, permitting the Dow’s efficiency relative to the Nasdaq to normalize within the short-term. For these involved with information and fundamentals as a substitute of the technicals, the narrative to clarify this worth motion would seemingly fixate round a hawkish Fed, larger charges, and disappointing earnings du jour.

Conversely, if chip shares and the massive benchmark indexes rip larger by present resistance, that may seemingly ship the Dow-to-Nasdaq ratio sinking far beneath its present degree.

The backside line is that shares may very properly surge from right here, and the technical setup suggests we’re an important juncture for this 12 months’s market rally.

But any rally led tech shares is more likely to be quick, livid, and short-lived.

Otherwise, markets might want to consolidate and save vitality for a extra sturdy transfer larger one other day.

What to Watch Today

Economy

8:30 a.m. ET: Chicago Fed Nat Activity Index, December (-0.05 throughout prior month)
8:30 a.m. ET: GDP Annualized, quarter-over-quarter, This fall Advance, (2.6% anticipated, 3.2% throughout prior quarter)
8:30 a.m. ET: Personal Consumption, quarter-over-quarter, This fall Advance (2.8% anticipated, 2.3% prior)
8:30 a.m. ET: GDP Price Index, quarter-over-quarter, This fall Advance (3.2% anticipated, 4.4% prior)
8:30 a.m. ET: Core PCE, quarter-over-quarter, This fall Advance (3.9% anticipated, 4.7% prior)
8:30 a.m. ET: Advance Goods Trade Balance, December (-$88.5 billion anticipated, -$83.3 billion throughout prior month)
8:30 a.m. ET: Wholesale Inventories, month-over-month, December Preliminary (0.5% anticipated, 1.0% throughout earlier month)
8:30 a.m. ET: Retail Inventories, month-over-month, December (0.2% anticipated, 0.1% throughout prior month)
8:30 a.m. ET: Initial Jobless Claims, week ended Jan. 21 (205,000 anticipated, 190,000 throughout prior week)
8:30 a.m. ET: Continuing Claims, week ended Jan. 14 (1.665 million anticipated, 1.647 million throughout prior week)
8:30 a.m. ET: Durable Goods Orders, December Preliminary (2.5% anticipated, -2.1% throughout prior month)
8:30 a.m. ET: Durables Excluding Transportation, December Preliminary (-0.2% anticipated, 0.1% throughout prior month)
8:30 a.m. ET: Non-Defense Capital Goods Orders Excluding Aircraft, December Preliminary (-0.2% anticipated, 0.1% throughout prior month)
8:30 a.m. ET: Non-Defense Capital Goods Shipments Excluding Aircraft, December Preliminary (-0.4% anticipated, 0.1% throughout prior month)
10:00 a.m. ET: New Home Sales, December (612,000 anticipated, 640,000 throughout prior month)
10:00 a.m. ET: New Home Sales, month-over-month, December (-4.4% anticipated, 5.8% throughout prior month)
10:00 a.m. ET: Kansas City Fed Manufacturing Activity, January (-8 anticipated, -9 throughout prior month)

Earnings

American Airlines (AAL), Visa (V), Archer-Daniels-Midland (ADM), Blackstone (BX), Comcast (CMCSA), Intel (INTC), JetBlue Airways (JBLU), Mastercard (MA), McCormick (MKC), Sherwin-Williams (SHW), Southwest Airlines (LUV), T. Rowe Price (TROW), Valero Energy (VLO), Xerox (XRX)