S&P 4300 by the end of February? | a cautious investor

We started the new year of 2024 with overheated stock markets, overly optimistic breadth indicators, and euphoric sentiment levels. The first week of January felt like a “wake-up call” decline for awed bulls, but last week the S&P 500 bounced right back to its all-time highs.

In that sense, leading growth companies like META are hitting new all-time highs. But will the S&P 500 and Nasdaq 100 follow suit, or is this the last gasp of a double-best pattern for the major market averages?

Today we’ll revisit a concept called “probabilistic analysis,” which presents four potential scenarios for the S&P 500. There are three things I want you to take away from this exercise.

1. It’s important to have a thesis on what you think will come next for a stock. It must be based on fundamentals, skills and a meaningful combination of four key elements:macroeconomics, and action. And your portfolio should be positioned to reflect the most likely outcome.
2. It is also important to consider alternative scenarios. What happens if the market is much weaker than expected? What happens if a 5 standard deviation event occurs and the stock price suddenly rises? The best way to break free from predetermined biases is to actively consider alternative perspectives. This exercise forces you to do just that.
3. It is very important to think about how you would adapt to one of these alternative scenarios. How will your portfolio perform in a risk-off environment in the coming months? Are you prepared for a sudden surge in risky assets? When will you need to change your position to fit this new reality? By thinking about these potential outcomes now, you will be much better equipped to deal with what actually happens.

I’ve found that the most successful investors don’t know all the answers, but they ask the best questions. So let’s take a broader look and consider four future paths the S&P 500 could take over the next six to eight weeks. But first, let me highlight some key levels to watch in the coming weeks.

SPX is now settled in a short-term range between 4700 and 4800 after a strong rally from the October 2023 lows. Whenever the market settles into a range like this, we know two things. First, a breakout is likely to occur soon. Second, no matter which direction the price falls, there is likely to be further movement in the same direction.

If the S&P rises out of this range, we will hit a new all-time high and the “big round number” of 5000 will finally be within our reach. What’s surprising about the bullish scenario here is that the S&P has tracked seasonal patterns incredibly well over the past 18 months. The additional strength here is completely at odds with the typical seasonal weakness in the first quarter of an election year..

Author’s note: I actually promised to play trumpet on my show. final barIf S&P 500 exceeds 5000. I will keep that promise and I have already taken out my horn to refine that promise a bit.

If the market declines over the next few weeks, we will see two key levels below short-term support near 4700. 4600 was the market high for July 2023, and I would not be surprised if that market follows technical analysis concepts. When previous resistance becomes support, it is called “polarity.” Below that, there is an important price gap around 4450. To me, this represents a “line in the sand” for strength, and if the S&P 500 fails to maintain that level (see super-bearback scenario below), there will be a lot of pain in the second quarter.

Let’s look at four potential scenarios. There are three main points of this exercise:

1. Consider all four potential future paths for the index, think about what could cause each scenario to unfold in terms of macro drivers, and examine which signals/patterns/indicators confirm the scenarios.
2. Decide which scenario you think is most likely and why. Don’t forget to leave me a comment and let me know your vote!
3. Consider each of the four scenarios that would impact your current portfolio. How would you manage the risk in each case? When and how will you take steps to adapt to this new reality?

Let’s start with the most optimistic scenario: a new all-time high as early as next week.

Scenario #1: A very optimistic scenario

In this first potential outcome, the decline in early January was a brief reset. The buying power we have observed this week continues and leading names such as META and NVDA continue to rise, which puts it at risk across the board.

In this scenario, the Fed meeting later this month would probably provide investors with some dovish relief. That’s because the Goldilocks scenario advocated by the Federal Reserve is pricing in a broad and strong rise well above the 5000 level.

Scenario #2: Mildly Bullish Scenario

Perhaps hitting new all-time highs will be a bit too much for investors to digest, given the high valuations we are already experiencing and the excessive bullish breadth and sentiment readings we have observed.

The second scenario would mean that a break above 4800 would be short-lived, the uptrend would not be able to follow as momentum would weaken, and SPX would end February between 4600 and 4800. This may also mean that the stock market experiences more time. There’s more of a correction than a price adjustment, and while you won’t lose much ground, you’ll shrink from your current range.

Scenario #3: Bearish Scenario

The bearish scenario includes a decline below the aforementioned 4600 level, while the third scenario implies no further losses beyond that. This is closer to a price correction than Scenario #2, but importantly SPX will remain above the price gap around 4450.

The typical season playbook in an election year is worth noting. This suggests weakness through March, with a market low expected in March, setting the stage for a strong jump in the second quarter. Scenario #3 means we follow that playbook very closely.

Scenario #4: Super Bearish Scenario

This is where things get really interesting. The last scenario is the “Doomsday Scenario”, which means that the nature of the market changes significantly. Broader terms begin to fall quickly, and the VIX surges well above 20 as anxiety spreads among investors.

Perhaps the Fed meeting and press conference will eventually focus more on persistent inflationary pressures. Perhaps this earnings season may end on a much more negative note than investors expect. The US dollar could rise higher and resume its previous role as a “crashing hole for risk assets.” There are discussions about a retest of the October 2022 lows around 4100 by the end of February.

Based on your analysis, have you decided which of the following four potential scenarios is most likely? Go to my YouTube channel. Please leave a comment with your vote and tell us why you think that is the most likely outcome.

We also did a similar analysis for the S&P 500 for September 2023.. The “slightly bearish” scenario ended up being largely consistent with market activity. Which scenario did you vote for?

Only by expanding your thinking through probabilistic analysis can you best prepare yourself for whatever the future holds!

RR#6,

dave

P.s Are you ready to upgrade your investment process? Check out our free behavioral investing course!

David Keller, CMT

Chief Market Strategist

StockCharts.com

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.

The author had no positions in any securities mentioned at the time of publication. All opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.