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.
While the market struggled to advance early in the week, on Thursday and Friday, markets climbed to set new closing highs for the year, as shown. However, the combination of overbought conditions and excess bullish sentiment limited gains from weaker-than-expected economic reports that should keep the Federal Reserve at bay next week. It is worth remembering, however, that we are still lower nearly two years later. Most investors have spent the last 15 months making up losses, and markets may struggle next year.
It's that time of year when Wall Street analysts start pinning targets for next year's performance of the S&P 500. Unsurprisingly, they are unanimously bullish, but there is a simple reason for that, which we will discuss today.
The rally continued this past week, and we are approaching the 100% retracement of the July highs. Such changes the dynamics of a pullback to the previous resistance levels of 78.6%, 61.8%, and 50% retracements. With the 50-DMA coinciding with the last 50% retracement level, we expect the maximum drawdown of any correction to hold that level going into year-end.