- The Dow’s historic losing streak and weak market breadth are concerning for the bulls.
- However, a rebound in the S&P 500 offers hope.
- Is a Santa rally still in play after yesterday's big drop?
- Discover the top stocks poised to benefit amid the stock market's surge using InvestingPro's powerful tools - now up to 55% off amid the Extended Cyber Monday offer!
The S&P 500 dropped sharply Wednesday as the Fed’s outlook for 2025 shifted sharply in the hawkish direction, with the FOMC signaling just 2 rate cuts for the year ahead worth a total of 50 basis points.
Stagflation could be the key theme moving into the new year, which Trump will be hoping to address with record deficit spending, while the stock market bulls will be hoping that the AI hype will continue to outweigh those concerns.
Anyway, for now, risk appetite has improved a little. Following the big post-FOMC drop, index futures staged a rebound overnight, while in the Asia Pacific, the Nikkei 225 led a rally after the Bank of Japan decided against a rate hike, a decision that also sent the yen tumbling and the USD/JPY soaring to 157.00 area.
Bitcoin fell below $100K, but it has since bounced back along with other risk assets to keep it above this psychologically important level for now.
Therefore, sentiment has improved a little after yesterday’s selling. But with the major risk events now behind us, the key question is whether the usual Santa rally will now resume or whether this time things might turn out to be different.
Can we really ignore the Dow’s losing run?
One thing that is becoming clear is that the bullish momentum is fading. And not just for the S&P. In fact, the bearish momentum is gathering pace for value stocks. The Dow Jones Industrial Average has hit its first 10-day losing streak since 1974.
From its highest point since the selling started, the Dow is now down some 2900 points at its lowest, all in just 2 weeks.
Market breadth raises serious questions
In addition to the Dow’s losing run, something unprecedented is unfolding in the S&P 500: in nearly a century of history, the US benchmark index has been near a record high this week until Wednesday’s drop, yet fewer than 39% of its stocks were trading above their 50-day moving averages.
Only just over 30% of S&P 500 stocks have outperformed the index year-to-date, marking the second consecutive year of such a low percentage after 2023's 29%. This has only happened once before, in 1998-1999, just before the Dot-com bubble burst. A few stocks are driving the entire market. What will happen if/when the tech bubble bursts?
S&P 500 Technical analysis and trade ideas
The S&P 500 futures have bounced back after a big post-FOMC drop on Wednesday. From a purely technical point of view, the rebound makes some sense given that we are still inside a long-term bullish trend, and given how strong that trend has been this year, the sellers were always going to take profit at or near the next support zone.
That of course doesn’t mean the selling is over just yet, but unless we now see some real downside follow-through, the bulls wouldn’t be too concerned just yet. For now, the index has found support right where it needed to: within the 5893-5927 zone. This is where the S&P had found resistance for much of October, before breaking above it post-election.
The initial re-test of this 5893-5927 area in mid-November held and so long as we don’t break decidedly below here this time, then a proper correction may well be avoided for now. However, if we do go below this zone in the days ahead then that could pave the way for a potential drop to 5805 initially ahead of 5721 – the July high. Thereafter, the long-term bullish trend line comes into play, and then the 200-day average around 5560 in the event this turns into a larger correction.
Meanwhile, the bears will be looking to defend broken support levels now, with the key one being around the 6040-5053 zone as highlighted in the red/orange on the chart. This area was tested multiple times, meaning a bunch of stops were starting to be placed below this area, which was taken post-FOMC.
The key question is whether the bears will now come back in after Wednesday’s first bearish price action in absolute ages. For this group of market participants, this zone is now the most important technical area to watch. An additional level to watch is around the 6,000 level where the broken support trend of the channel that the index had been residing inside since August comes into play.
***
Curious to learn how top investors are structuring their portfolios for 2025?
Take advantage of our Extended Cyber Monday offer—your last chance to secure InvestingPro at a 55% discount—and gain insights into elite investment strategies and access over 100 AI-driven stock recommendations every month.
Interested? Click on the banner below to discover more.
***
Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.