S&P 500’s current rally likely to stall
THE S&P 500 saw its bullish uptrend continue in January, extending its gains by over 3 per cent to new all-time highs following a consolidation range breakout. The current “Goldilocks” period in the US economy, where economic conditions are just right with moderate growth and low inflation, has helped uphold investor optimism.
The US economy grew at a more rapid pace than expected in the last quarter of 2023, easily avoiding a recession and continuing to defy sceptics. Its gross domestic product grew 3.3 per cent in the fourth quarter, beating Wall Street estimates for a 2 per cent gain and following up on the third quarter’s blistering 4.9 per cent pace.
In addition, there was continued progress on inflation. The recent release of the Personal Consumption Expenditures (PCE) data, which is the Federal Reserve’s preferred inflation gauge, showed the pace of inflation moderated further in December. The Core PCE price index gained 2.9 per cent year-on-year against consensus estimates of 3 per cent, continuing a decline from the previous month’s reading of 3.2 per cent. However, from a technical perspective, investors should exercise caution as the current rally could stall at the 5,000 level.
Firstly, the S&P 500 is approaching the main uptrend channel resistance at 5,000 which has previously acted as significant reversal points in November 2022 and July 2023.
Secondly, the Moving Average Convergence Divergence and Relative Strength Index technical indicators are displaying bearish divergence signals where they posted lower highs despite the index making new all-time highs. This signifies a decline in bullish momentum and a potential reversal ahead.
Thirdly, the Fear & Greed Index, which is used by investors to gauge the overall market sentiment, is currently flashing an “Extreme Greed” signal, standing at 77/100. The last two times when the index climbed above 80 happened in February and July 2023, where corrections occurred in the following month on both occasions.
Moving forward, given the several reasons mentioned above, the S&P 500’s rally is likely to stall at the 5,000 psychological level. Investors can take the opportunity to lighten up on long positions and position for lower entries.
The writer is research analyst at Phillip Securities Research
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