Inventory Market Delivered Enormous Present, Wipes Away Recession Fears | ChartWatchers

Final week’s statements from Fed Chairman Jerome Powell urged that rate of interest cuts may come quickly, which resulted in a pointy rally within the inventory market. This was a special narrative from the feedback Powell made earlier, wherein he urged it was too early to invest rate of interest cuts.

Revised GDP slowed within the third quarter to 4.9%, and jobless claims rose to 205K. The Private Consumption Expenditures (PCE) Index for November fell 0.1%. There hasn’t been a decline on this knowledge level since April 2020. 12 months-over-year, PCE was up 2.6%, which is decrease than economists anticipated. And core PCE was up 3.2% in November, which is decrease than expectations however nonetheless increased than the two% Fed goal.

Different knowledge exhibits that non-public revenue and shopper spending rose, additional reinforcing the economic system’s well being. All these knowledge factors are optimistic for the inventory market and will transfer the broader inventory market indices increased. If the development continues, we may see a Santa Claus rally this 12 months.

A Wholesome Pullback

Inventory market worth motion on Wednesday made buyers jittery, and recession worries resurfaced. However pullbacks might be wholesome. When you have a look at the every day chart of the Dow Jones Industrial Common ($INDU) under, you’ll be able to see that the relative energy index (RSI) was overbought. Thus, a short-term pullback near the earlier excessive of slightly below 37,000 is wholesome and a sign the index will resume its longer-term uptrend. To this point, though the Dow Jones Industrial Averaged closed barely decrease, the uptrend continues to be intact.

CHART 1: DAILY CHART OF DOW JONES INDUSTRIAL AVERAGE ($INDU). The index continues to be sustaining its uptrend regardless of the selloff on Wednesday. The earlier excessive, barely under 37,000, is the primary help degree to look at. Chart supply: StockCharts.com. For instructional functions.

That the RSI dropped nearer to 70 suggests momentum pale after the Dow’s nine-day profitable streak. Because the Dow’s current ascent was fairly steep, it is a good suggestion so as to add a short-term transferring common as a help degree. Within the chart under, a 15-day exponential transferring common (EMA) was overlaid on the chart of the Dow Jones Industrial Common. The 15-day EMA is not too far off from the 37,000 degree.

Small Caps Rising

One other space of focus is the worth motion of small-cap shares. The January impact is all about small-cap shares and we have seen this group of shares rise from mid-December. Smaller firms profit from a decrease rate of interest atmosphere, since borrowing prices are decrease. The every day chart of the S&P 600 Small Cap Index ($SML) under exhibits that small caps are buying and selling at their yearly highs. If financial situations maintain their present development, 2024 ought to be a superb 12 months for small-cap shares.

CHART 2: DAILY ONE-YEAR CHART OF S&P 600 SMALL CAP INDEX ($SML). Small caps have been shining since November, primarily due to decrease rates of interest. Small-cap shares are inclined to carry out higher in January. Chart supply: StockCharts.com. For instructional functions.

The Bond Market

Bond and inventory costs are usually negatively correlated. Bond costs have risen since mid-October (see weekly chart under of iShares 20+ 12 months Treasury Bond ETF), which exhibits that Fed financial selections are affecting the monetary markets. The next rate of interest atmosphere made fairness buyers reluctant to purchase shares. However now that Treasury charges present indicators of reversing, situations are stabilizing. 

CHART 3: BOND PRICES ARE RISING. After struggling for a number of years, bonds could also be beginning to present their worth. But it surely’s too early to inform if the uptrend shall be long-term. Search for a break above the 105 degree. Chart supply: StockCharts.com. For instructional functions.

Treasury yields and bond costs transfer inversely, so with Treasury yields dropping, it is no shock that bond costs are rising. Nonetheless, bond costs nonetheless should go a lot increased earlier than trending increased. A break above the 105 degree can be optimistic for TLT and a sign to allocate a barely bigger portion of your portfolio to bonds. 

Now that inflation is cooling, the US greenback is transferring decrease (see chart under). The month-to-month chart exhibits that though the US greenback is falling, it is nonetheless excessive. If it continues decrease and hits the July 2023 low, it could possibly be a further catalyst to ship shares and bonds rallying increased.

CHART 4: THE US DOLLAR IS FALLING BUT STILL HIGH, RELATIVELY SPEAKING. If inflation continues to chill, the US greenback may fall additional, which could possibly be bullish for shares and bonds. Chart supply: StockCharts.com. For instructional functions.

Inventory Market Volatility

With inflation abating, buyers have turn into extra complacent, as indicated by the CBOE Volatility Index ($VIX) buying and selling round 13. A low VIX means that buyers aren’t fearful and are keen to put money into riskier belongings. There’s not a lot concern about portfolio hedging.

CHART 5: LOW VOLATILITY MEANS INVESTORS ARE COMPLACENT. Though the CBOE Volatility Index exhibits that buyers aren’t nervous about hedging their portfolios, buyers ought to watch this index as it may possibly point out a shift in investor sentiment. Chart supply: StockCharts.com. For instructional functions.

However that may change, so buyers must control the VIX. It tends to spike, and any indicators of it transferring out of its consolation zone ought to be a sign that maybe issues aren’t going to be optimistic for too lengthy. It could not occur for some time, but it surely’s one thing to look at.

The inventory market went by way of attention-grabbing ebbs and flows this 12 months. There is not any telling what 2024 shall be like, however you’ll be able to keep on prime of the inventory market motion utilizing the instruments obtainable at StockCharts.com.

Glad holidays from the StockCharts staff.

Disclaimer: This weblog is for instructional functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your personal private and monetary state of affairs or with out consulting a monetary skilled.