Weekly S&P500 ChartStorm - 7 January 2024

This week: technicals check, financial conditions loop, seasonal/cycle scripts, election year energy, recession pricing, passive investing, return stats, and prospective ERP...

Welcome to the latest Weekly S&P500 #ChartStorm!

Learnings and conclusions from this week’s charts:

• The market has run into round-number resistance.

• The finconds rally has stalled as some of the previous upside drivers from the Fed pause euphoria have fizzled out.

• Election years tend to be good (88% positive) likewise post-20%+ years (80%).

• Passive funds now account for more than 50% of AUM.

• The “prospective ERP” has dropped back to July-peak levels.

Overall, a great end to 2023 has given way to a lousy start to 2024. Technically the market was looking ready for a bit of a pullback, and folk may have gotten carried away on some of the bullish themes and narratives. So maybe we can call this a “healthy correction” — particularly given the otherwise decent track record for election years in the stock market.

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1. Round-number Resistance: As flagged last week, it looks like we’re going to have a bit of trouble getting through that 4800 round-number resistance zone (which is standing in the road of a new all-time high). With breadth also stalling at resistance it’s quite possible we see a retest of that 4600 support level (so watch that level as both a potential risk trigger if it breaks down or entry if it holds).

Source: @Callum_Thomas using Market Charts

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2. Risk and Return Drivers:  Regular readers will recall I had this chart as a running feature last year because of how the deterioration in financial conditions triggered the correction in the first place, and subsequent recovery. And it remains relevant. The S&P500 ran into resistance just as bond yields + USD rebounded, and XLK lost ground vs XLE (i.e. tech stocks stumbling vs crude oil finding a clear support level). Once again — keep an eye on these.

Source:  Callum Thomas using StockCharts

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3. Financial Conditions:  Following markets making up their mind that the Fed is done with rate hikes, US financial conditions have eased significantly since the October climax. One little issue here is if markets take financial conditions too far easier, improving the growth (+inflation resurgence) upside case, and hence taking rate cuts off the table, and bursting the Fed peak narrative, and resulting in tighter financial conditions again. We may end up stuck in a reflexive range.

Source: 

Daily Chartbook

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4. Entirely to Script:  Curiously enough, this apparent shift in the risk outlook comes against a backdrop of seasonal shakiness…