S&P 500 Update: On Wednesday, U.S. stocks experienced a significant retreat following the Federal Reserve's unexpected shift to a more hawkish stance for 2025, with indications of only two rate cuts totaling 50 basis points this year. This pivot has reignited concerns about potential stagflation as we approach the new year. While optimistic investors are leaning on artificial intelligence advancements to counterbalance emerging risks, the prevailing appetite for risk may now encounter obstacles. In the aftermath of the Federal Open Market Committee's (FOMC) announcement, S&P 500 futures displayed resilience overnight, suggesting a positive opening for cash markets. The Asia-Pacific region also saw a rally, particularly with Japan’s Nikkei rising sharply after the Bank of Japan opted to maintain interest rates, contributing to a notable depreciating trend in the yen. Bitcoin briefly dipped below the psychologically significant $100K mark but quickly rebounded, providing a glimmer of hope for the risk assets overall.
Dow's Streak Triggers Broader Market Concerns
The recent bearish sentiment extends beyond the S&P 500, with the Dow Jones Industrial Average facing its first 10-day losing streak since 1974, plummeting nearly 2,900 points over a two-week span. This decline in traditional value stocks highlights a stark contrast with the tech-driven robustness demonstrated by the S&P 500 and Nasdaq 100.
Compounding worries, less than 39% of S&P 500 stocks are trading above their 50-day moving averages, even as the index maintained near its record highs until Wednesday's downturn. Furthermore, only around 30% of S&P 500 stocks have outperformed the index year-to-date, echoing a troubling pattern reminiscent of the Dot-com bubble. This concentration of gains within a small subset of tech stocks leaves the wider market exposed should the technological surge wane.
Technical S&P 500 Outlook: Key Levels to Monitor
Following the post-FOMC pullback, the S&P 500 has shown signs of recovery but sits at critical technical junctures. The 5831-5882 range, which acted as a resistance in October, now serves as essential support. The mid-November test of this area held, and it has done so once more. If this zone can sustain, it could prevent a more substantial correction.
Conversely, a decisive break beneath this range may trigger a decline towards 5772 initially, while the July peak at 5670 may serve as subsequent support. A fall past these levels could expose the long-term bullish trendline and the 200-day moving average, currently situated near 5540.
For the bears, the focus must shift to defending the 6,000-6030 resistance zone. This area was pivotal prior to the post-FOMC selloff and now stands as a crucial barrier. A failure to reclaim this zone would likely empower sellers, potentially amplifying downward pressure. Before this, the retracement of the broken trend support from the bullish channel established since September is present at 5945, adding yet another layer of resistance to monitor.
Will It Be a Santa Rally or a Seasonal Setback?
With major risk events concluding this week, the pivotal question emerges: will the traditional Santa rally materialize, or will 2024 signify a break from this seasonal norm? The S&P 500 chart and the deteriorating market breadth advise a cautious approach, though there is anticipation whether the market, despite prevailing pessimism, might once again establish a favorable bottom and offer a bullish signal. For the moment, prudence is essential in light of this week’s market movements and the Fed’s hawkish commentary.
-- Analysis Provided by the Market Insights Team
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