S&P 500 January Rally Masks Waning Momentum as Treasury Liquidity Tightens

January ended with the S&P 500 posting a 1.4% gain, a number that sounds reassuring until you look under the hood. The index continues to grind higher, but the engine is sputtering. Momentum is fading, breadth is thinning, and the technicals are starting to look like a game of Jenga after too many cocktails. The market’s ability to shrug off geopolitical and macro shocks is being tested, and the cracks are showing up in places traders can’t ignore.

The news cycle is a parade of warnings: “Beware February,” “Treasury Issuance Appears To Be A Problem For Risk Assets,” and “There’s now a bigger risk for stocks than the economy or corporate earnings.” The S&P 500 is still the “least ugly house on the block,” but the neighborhood is getting sketchier. Treasury settlements are draining liquidity, with the TGA sucking $64.3 billion out of the market. That’s not just a rounding error. When liquidity dries up, risk assets get nervous.

Small caps? Useless, for now. The rotation that everyone keeps calling for is still a mirage. Large caps are the only game in town, and even there, the leadership is narrowing. The energy sector is being touted as a leading indicator, but that’s mostly because everything else is looking tired. Dividend stocks are getting attention as a defensive play, but that’s a symptom, not a solution.

The technicals tell a story of a market that wants to go higher but is running out of fuel. The January close above previous highs is bullish on the surface, but the underlying momentum is fading. RSI is rolling over. Volume is down. The VIX remains subdued, but that’s more a function of complacency than confidence. The last time we saw this setup, it didn’t end well.

The macro backdrop is a mixed bag. Earnings are fine, the economy is solid, but the real risk is exogenous. Treasury issuance is tightening liquidity, and the market is starting to price in the possibility that the Fed might not be as dovish as everyone hopes. The “Bye America” trade is lurking in the background, and any sign of a policy misstep could trigger a rush for the exits.

Strykr Watch

Technically, the S&P 500 is holding above key support, but the warning signs are multiplying. The index needs to stay above the January close to maintain its bullish posture. Watch for a break below recent lows as a trigger for a deeper pullback. The breadth indicators are flashing caution, and the leadership is narrowing to a handful of mega-caps. The energy sector is worth watching as a canary in the coal mine. If it starts to roll over, the rest of the market could follow.

The risk is that liquidity continues to tighten, and the market is forced to reprice risk. The opportunity is that any dip is likely to be bought, at least initially, as long as the macro backdrop remains stable. But don’t expect a smooth ride. The market is entering a period of elevated volatility, and the margin for error is shrinking.

If the S&P 500 can hold above recent support and reclaim momentum, the path to new highs is still open. But if liquidity dries up and breadth continues to narrow, the risk of a sharp correction increases. This is a market that rewards discipline and punishes complacency.

Strykr Take

The S&P 500 is still the only game in town, but the rules are changing. Liquidity is tightening, momentum is fading, and the risks are rising. This is not the time to get cute. Stick to your process, respect your stops, and don’t chase. The easy money has been made. Now comes the hard part.

Strykr Pulse 62/100. Still bullish, but the cracks are widening. Threat Level 3/5.