US stock markets looking a little overstretched
Following extremely dovish rate cut expectations that drove stocks to record highs in December 2023, a market correction was expected as it became clear the Fed would delay trimming rates. Although a minor correction occurred in the first week of 2024, the markets have continued to surge into uncharted territory, despite reduced chances of a March rate cut.
Investors' confidence in the face of elevated interest rates suggests a belief that peak interest rates have been reached, although sceptics warn of underestimating risks such as rising shipping costs due to the Red Sea situation.
Concerns include limited participation from non-tech stocks. With Microsoft and Apple constituting 14% of the S&P 500, a wobble in the sector could undermine confidence – and the markets. Tesla's disappointing results raise questions about the rapid stock market ascent, particularly in the AI sector, where optimism may be turning into irrational exuberance.
Overlooking challenges including the recent struggles in Chinese markets and global inflation fears from rising shipping costs, investors may have become too optimistic. The reliance on top tech companies and AI optimism poses risks of a potential correction. Meanwhile, signs of persistent or rebounding inflation may trigger such a move, with the Fed possibly delivering more hawkish remarks than expected at its meeting next week.
S&P 500 technical analysis
As the S&P has achieved consecutive all-time highs this week, the prevailing trend is decidedly bullish, with markets currently embracing a "buy-the-dip" approach, at least for now. However, indications suggest the rally might be thinning at these levels, evident from the S&P sub-chart showing the Relative Strength Index (RSI) reaching "overbought" territory, possibly prompting profit-taking.
The market's consistent pattern of higher highs and higher lows suggests bearish investors are mostly on the side-lines, awaiting a clear reversal pattern before active participation. The small inverted hammer candle on Wednesday may signal increasing caution, particularly after Tesla's disappointing earnings.
In the event of a market pullback, attention may centre on the shaded blue area on the chart, ranging from 4795 to 4817, representing the prior two all-time highs in January 2022 and December 2023. Even if the market slightly dips below this zone, it may not necessarily signal negativity or a peak, as numerous dip-buyers could be waiting to capitalize on short-term downturns.
A more significant concern would arise with a breakdown in the market structure of higher highs and higher lows. The recent low at 4713 could be a crucial threshold for short-term bullish traders. Breaching this level would establish a lower low, offering an objective exit signal for bulls, potentially leading to subsequent technical selling. Any interim weakness should be viewed as a routine pullback typical in a rising trend.
Written by Fawad Razaqzada, market analyst at FOREX.com
Investors' confidence in the face of elevated interest rates suggests a belief that peak interest rates have been reached, although sceptics warn of underestimating risks such as rising shipping costs due to the Red Sea situation.
Concerns include limited participation from non-tech stocks. With Microsoft and Apple constituting 14% of the S&P 500, a wobble in the sector could undermine confidence – and the markets. Tesla's disappointing results raise questions about the rapid stock market ascent, particularly in the AI sector, where optimism may be turning into irrational exuberance.
Overlooking challenges including the recent struggles in Chinese markets and global inflation fears from rising shipping costs, investors may have become too optimistic. The reliance on top tech companies and AI optimism poses risks of a potential correction. Meanwhile, signs of persistent or rebounding inflation may trigger such a move, with the Fed possibly delivering more hawkish remarks than expected at its meeting next week.
S&P 500 technical analysis
As the S&P has achieved consecutive all-time highs this week, the prevailing trend is decidedly bullish, with markets currently embracing a "buy-the-dip" approach, at least for now. However, indications suggest the rally might be thinning at these levels, evident from the S&P sub-chart showing the Relative Strength Index (RSI) reaching "overbought" territory, possibly prompting profit-taking.
The market's consistent pattern of higher highs and higher lows suggests bearish investors are mostly on the side-lines, awaiting a clear reversal pattern before active participation. The small inverted hammer candle on Wednesday may signal increasing caution, particularly after Tesla's disappointing earnings.
In the event of a market pullback, attention may centre on the shaded blue area on the chart, ranging from 4795 to 4817, representing the prior two all-time highs in January 2022 and December 2023. Even if the market slightly dips below this zone, it may not necessarily signal negativity or a peak, as numerous dip-buyers could be waiting to capitalize on short-term downturns.
A more significant concern would arise with a breakdown in the market structure of higher highs and higher lows. The recent low at 4713 could be a crucial threshold for short-term bullish traders. Breaching this level would establish a lower low, offering an objective exit signal for bulls, potentially leading to subsequent technical selling. Any interim weakness should be viewed as a routine pullback typical in a rising trend.
Written by Fawad Razaqzada, market analyst at FOREX.com
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