The stock market witnessed a significant retreat on Wednesday, but investors are now cautiously re-entering the fray. However, the potential for a continued turbulent period looms large, with technical analysts and market veterans sounding cautionary notes about the risks ahead.
According to BI citing CNBC, Katie Stockton of Fairlead Strategies has highlighted that the extent of the market’s rebound in the immediate days following the sell-off will be critical in assessing future risks. She warns that without a substantial recovery by the end of Friday, key technical indicators could flash sell signals for the first time in months. Specifically, Stockton points to the weekly stochastics indicator, which might indicate an overbought condition leading to a downturn. Additionally, the moving-average-convergence-divergence (MACD) indicator, known for its straightforward buy or sell signals, is nearing a potential sell signal not seen since July. Should both indicators turn negative, it could herald a medium-term correction of 7% to 10% for the S&P 500.
Despite these ominous signs, the timing of this market dip coincides with a period historically known for positive market performance. Stockton acknowledges the seasonal “Santa Claus rally,” which typically sees gains in the last five trading days of the year and the first two of the new year. This could potentially cushion the market from immediate further declines or even propel a short-term recovery into the new year.
However, Stockton advises investors to look for these sell signals before adjusting their strategies, suggesting a wait-and-see approach rather than immediate action. This caution, as noted by BI, is echoed by market analyst Ed Yardeni, who sees the market remaining volatile through January. Yardeni lists several factors contributing to this outlook, including profit-taking, the threat of a dock strike, and the anticipation of numerous executive orders from the incoming Trump administration. While he acknowledges the possibility of a 10% correction, Yardeni views such an event as a buying opportunity rather than a signal to exit the market, arguing against the likelihood of an impending recession or bear market.
This scenario presents investors with a complex landscape where short-term reactions to market movements must be balanced with longer-term economic and political developments. The interplay between technical indicators and seasonal trends, combined with macroeconomic factors like Federal Reserve policy and new administration policies, suggests that while there might be immediate opportunities for gains, the market could still face significant downturn risks. Investors are thus advised to remain vigilant, possibly keeping some powder dry for potential dips, as suggested by Fundstrat’s Tom Lee, while not abandoning the market entirely due to short-term volatility. The coming days and weeks will be crucial in determining whether the market will stabilize or if further correction is on the horizon.
Reference: BI
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