Stock market delivers huge gift, dispelling recession fears | chart watcher
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gist
- Cooling inflation data pushes the S&P 500 higher, a good start to the Santa Claus rally.
- Investors should monitor small-cap stocks and bonds and consider adding them to their investment portfolio.
- Although volatility is low, investors should continue to monitor the VIX for changes in investor sentiment.
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 ($INDU) daily chart below, you can see that the Relative Strength Index (RSI) is overbought. Therefore, a near-term decline near the previous high of 37,000 is healthy and indicates that the index will resume its long-term upward trend. So far, the Dow Jones Industrial Average has closed slightly lower, but its upward trend remains intact.
RSI nearing 70 means the Dow has lost momentum after nine straight days of gains. Since the recent rise of the Dow has been quite steep, it is recommended to add a short-term moving average as a support line. In the chart below, the 15-day exponential moving average (EMA) is overlaid on a chart of the Dow Jones Industrial Average. The 15-day EMA is not far from the 37,000 level.
Small-cap stocks rise
Another area of interest is the price movement of small-cap stocks. January effect all depends on small-cap stocks And we’ve seen this group of stocks rise since mid-December. Smaller companies benefit in a low interest rate environment because their borrowing costs are lower. The daily chart of the S&P 600 Small Cap Index ($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.
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.
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.
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.
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.
Jayanthi Gopalakrishnan is the Director of Site Content at StockCharts.com. She spends her time creating content strategies, providing content to educate traders and investors, and finding ways to make technical analysis fun. Jayanthi was the Editor-in-Chief of T3 Custom, a content marketing agency for financial brands. Prior to that, she served as Technical Analysis Editor for Stocks & Commodities magazine for over 15 years. Learn more