The market rebounded mid-week from the disappointing inflation report but stumbled again on Friday after producer inflation. The market's momentum remains strong, and investor optimism is very high. The only question is what causes a short-term correction to reduce the deviations between the market and the 200-DMA, as shown above. Stocktrader's Almanac provided a clue.
Last week's newsletter discussed the ongoing bullish trend of the market. That unstoppable advance, driven by the mega-capitalization stocks on Friday, topped the psychological 5000 level on the index. With the strong momentum carrying that particular group of stocks, the index will likely try to push higher over the next few days. However, as shown, the market is back to more extreme overbought levels, and bullish sentiment has reached "greed."
We have discussed the need for a market correction over the last few weeks. On Wednesday, the FOMC statement sent the stock lower as Jerome Powell eliminated the possibility of a rate cut by March. However, a stellar employment report on Friday, which would suggest the Fed stays on hold longer, sent the market surging to all-time highs.
The MACD "buy signal" is firmly intact, although at a high level, suggesting the bullish bias remains. While the market is overbought in the short term, corrections will likely remain mild with 4800, where the market broke out, remaining essential support.
Last week's newsletter discussed the failure of the first five days of January and what that historically means for the rest of the year. That consolidation likely ended on Friday, with the market breaking out to set a new all-time high for the S&P 500.
Unfortunately, the S&P 500 Index failed that initial test of the New Year by providing a negative return over those first five trading days. As shown in the chart below, the implications of the failure are potentially lower returns for the entire year.
Unfortunately, the beginning of 2024 started with a sell-off that wiped out all of the gains from the last five days of December. In other words, "Santa Failed To Visit Broad And Wall."
While the price action this past week reduced some of the overbought conditions, as represented by the Relative Strength Index (RSI), more work is still ahead. Next week, the "Santa Claus Rally" will officially begin, lasting through the first two days of January. Given the overbought condition, further upside may remain limited.
As we will discuss, the FOMC pivot sent stocks soaring and bond yields lower, as the message was more dovish than even the bulls expected. Notably, as measured by the volatility index, any bearishness was crushed.