S&P 500 Rally Stalls as Treasury Liquidity Drains and Geopolitical Risks Flare

The S&P 500 has been the market’s favorite party for months, but the music is starting to sound a little off-key. January closed with a respectable +1.4% gain, enough to keep the permabulls happy, but the mood has shifted. Momentum is fading, and the market is suddenly obsessed with Treasury issuance, liquidity drains, and a new round of geopolitical jitters. If you thought the only thing that could stop this rally was a Fed surprise, think again.

Let’s get into the weeds. According to Seeking Alpha and MarketWatch, the S&P 500’s January performance was solid, but the tape is telling a different story. Liquidity is tightening, thanks to a surge in Treasury settlements and a swelling Treasury General Account (TGA) that has drained $64.3 billion from risk assets. The algos can smell it. Every dip is being bought a little less aggressively. Small caps, once the darlings of the reflation trade, are now “useless” according to Seeking Alpha. The big are getting bigger, and the rest are left fighting for scraps.

The macro backdrop isn’t helping. Geopolitical risk is back on the front page, with MarketWatch warning that the biggest threat to stocks isn’t earnings or the economy, but the kind of left-field event that makes risk managers lose sleep. The energy sector, usually a canary in the coal mine, is flashing mixed signals. Meanwhile, dividend stocks are getting a fresh look as investors hunt for stability in an increasingly unstable world.

Zoom out, and the picture gets even murkier. The S&P 500’s rally has been driven by a handful of mega-caps, while the average stock is barely treading water. The last time we saw this kind of breadth divergence was late 2021, right before the market hit a wall. Liquidity is the lifeblood of this rally, and the Treasury’s thirst for cash is starting to matter. The TGA’s drain is pulling dollars out of the system, making every risk asset a little more fragile. If the Fed stays on hold, maybe the party continues. But if the Treasury keeps sucking up liquidity, even the best earnings season won’t save the tape.

Technically, the S&P 500 is at a crossroads. The index is testing resistance at recent highs, but momentum is waning. The 50-day moving average is still rising, but the RSI is showing signs of exhaustion. Small caps are underperforming, and the usual risk-on signals are fading. If the index can’t break out to new highs soon, the risk of a deeper pullback increases. Watch for a break below the 20-day moving average as a sign that the bulls are losing control.

Strykr Watch

The S&P 500 is flirting with resistance near its all-time highs. The 50-day moving average is a key level to watch—if the index closes below it, expect the selling to accelerate. Support comes in at the 20-day moving average, with a bigger floor at the 200-day. Breadth is weak, and the rally is looking tired. If small caps can’t catch a bid, the leadership will get narrower, and the risk of a reversal increases. Keep an eye on Treasury auctions and TGA flows—they’re the new wild cards.

The risks are piling up. Treasury issuance is draining liquidity, making every dip a little scarier. Geopolitical shocks are lurking, and the market’s breadth is the weakest it’s been in years. If the S&P 500 breaks below its 50-day, the pain could get real, fast. And if the Fed surprises with a hawkish tilt, all bets are off.

But there’s still opportunity. If the index can hold above its 50-day and breadth improves, there’s room for another leg higher. Dividend stocks are getting a fresh look, and the energy sector could lead if geopolitical risk flares. For the brave, buying dips with tight stops makes sense, but don’t get greedy. The days of easy gains are over—for now.

Strykr Take

This isn’t a crash, but it’s not a healthy rally either. The S&P 500 is running on fumes, and liquidity is the new risk. If you’re long, keep stops tight and watch the TGA like a hawk. If you’re looking for a short, wait for a break below the 50-day. The market’s not done, but the easy money is. Strykr Pulse 54/100. Threat Level 3/5.