Stock market delivers huge gift, dispelling recession fears | chart watcher

Last week, a statement from Federal Reserve Chairman Jerome Powell hinted that a rate cut could come soon, resulting in a surge in the stock market. This is a different explanation from Chairman Powell’s earlier statement that it was too early to speculate on an interest rate cut.

Adjusted GDP slowed to 4.9% in the third quarter and jobless claims rose to 205,000. The personal consumption expenditures (PCE) index in November fell 0.1%. This data point has not declined since April 2020. Year-over-year, PCE rose 2.6%, which was lower than economists expected. Core PCE rose 3.2% in November, lower than expected but still above the Fed’s 2% target.

Other data shows that personal incomes and consumer spending rose, further strengthening the health of the economy. All of these data points are positive for the stock market and could move broader stock market indices higher. If this trend continues, we will be able to see a Santa Claus rally this year as well.

healthy fullback

Wednesday’s stock market price action unnerved investors and resurrected recession fears. But the fullback could be healthy. If you look at the Dow Jones Industrial Average ($INDU) daily chart below, you can see that the Relative Strength Index (RSI) is overbought. Therefore, a near-term decline near the previous high of 37,000 is healthy and indicates that the index will resume its long-term upward trend. So far, the Dow Jones Industrial Average has closed slightly lower, but its upward trend remains intact.

Chart 1: Daily chart of the Dow Jones Industrial Average ($INDU). Despite Wednesday’s sell-off, the index remains on the rise. The previous high slightly below 37,000 is the first support level to note. Chart source: StockCharts.com. For educational purposes.

RSI nearing 70 means the Dow has lost momentum after nine straight days of gains. Since the recent rise of the Dow has been quite steep, it is recommended to add a short-term moving average as a support line. In the chart below, the 15-day exponential moving average (EMA) is overlaid on a chart of the Dow Jones Industrial Average. The 15-day EMA is not far from the 37,000 level.

Small-cap stocks rise

Another area of ​​interest is the price movement of small-cap stocks. January effect all depends on small-cap stocks And we’ve seen this group of stocks rise since mid-December. Smaller companies benefit in a low interest rate environment because their borrowing costs are lower. The daily chart of the S&P 600 Small Cap Index ($SML) below shows small caps trading at yearly highs. If economic conditions maintain their current trends, 2024 will be a good year for small-cap stocks.

Chart 2: One-year daily chart of the S&P 600 Small Cap Index ($SML). Small-cap stocks have been shining since November, mainly due to falling interest rates. Small-cap stocks tend to perform better in January. Chart source: StockCharts.com. For educational purposes.

bond market

Generally, bond prices and stock prices show a negative correlation. Bond prices have been rising since mid-October (see iShares 20+ Year Treasury Bond ETF weekly chart below). This shows that the Fed’s monetary decisions are having an impact on financial markets. The high interest rate environment has made stock investors reluctant to buy stocks. However, the situation is now stabilizing, with Treasury yields showing signs of a reversal.

Chart 3: Bond prices are rising. After struggling for a few years, bonds may start to show their value. However, it is too early to tell whether the upward trend will continue in the long term. Look for breaks above the 105 level. Chart source: StockCharts.com. For educational purposes.

Treasury yields and bond prices move in opposite directions, so it is not surprising that bond prices rise when Treasury yields fall. But bond prices would still have to go much higher for an upward trend to occur. Anything above the 105 level would have a positive impact on TLT and would be an indication of allocating a slightly larger portion of the portfolio to bonds.

Now the US dollar is falling as inflation cools (see chart below). Looking at the monthly chart, we can see that the value of the US dollar is falling, but is still at a high level. If it continues to decline and reaches a low in July 2023, it could be an additional catalyst for stocks and bonds to rise.

Chart 4: The US dollar is falling, but still relatively high. If inflation continues to cool, the U.S. dollar could fall further, which could be positive for stocks and bonds. Chart source: StockCharts.com. For educational purposes.

stock market volatility

Investors have become more complacent as inflation eases, as evidenced by the CBOE Volatility Index ($VIX) trading around 13. A low VIX indicates that investors are not afraid and are willing to invest in riskier assets. There are few concerns about portfolio hedging.

Chart 5: Low volatility means investors are complacent. The CBOE Volatility Index shows that investors are not worried about portfolio hedging, but investors should watch this index carefully as it could indicate changes in investor sentiment. Chart source: StockCharts.com. For educational purposes.

But things can change, so investors should keep an eye on VIX. There is a tendency for things to spike, and any sign of a break out of the comfort zone is probably a sign that things won’t remain optimistic for too long. It may not happen for a while, but we’ll have to wait and see.

The stock market has gone through some interesting ebbs and flows this year. We don’t know what 2024 will bring, but you can use the tools available at StockCharts.com to stay on top of stock market trends.

Happy holidays from the StockCharts team.

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.