US stocks: the market expects new rallies, here’s why

19 January 2024 - 17:00

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With the S&P 500 reaching annual highs, many are wondering whether a new wave of rallies is coming. Here are some indicators to get an idea of the market.

US stocks: the market expects new rallies, here's why

After a rather ambiguous start to the year, which alternated between an initial contraction in prices and a subsequent significant recovery, the reference index of the American stock market, the S&P 500, is now once again at the highest levels of the year, attracting the attention of market operators. Could the recent rise in the US market be the anticipation of a new bullish trend? Here are some facts to consider.

What is happening in the stock market in the United States?

It is first necessary to look at the situation from an intermarket perspective. The latest inflation data in the US showed an increase compared to the previous month’s value and consensus forecasts. This news did not scare the risk-on-equity sector, but instead weighed down other markets, leading to a slight rise in US Treasury yields and a takeoff in the DXY, the US dollar index. From an economic point of view, it is impossible not to notice a strong increase in gold futures, stimulated by Middle East tensions. Despite these geopolitical instabilities, the stock market has not shown excessive contractions, except in some specific cases. In summary, the market continues to receive capital inflows which, by positively influencing demand, stimulate the price of the various stock market indices.

S&P 500: what can we read from the technical indicators?

Many see this period as anticipating a strong uptrend for the remainder of 2024. It would be interesting to closely follow some market stress indicators better to understand the current technical situation of the S&P 500.

First, let’s analyze the relationship between Value Stocks and Growth Stocks, which appears in a bearish direction, highlighting notable outperformance in recent months by growth companies. Especially big tech, favored by the push of artificial intelligence. Looking at large caps, the FAANG index has returned to trading near its all-time highs. As regards the relationship between small cap and big cap, after a strong recovery of small caps at the end of the year, thanks to new expectations on interest rate cuts, 2024 seems to bring attention to the "Magnificent 7", which continue their race towards new highs, causing a substantial decrease in the value of the ratio.

Moving on to stress indicators, the S&P 500 Stocks Above 50-Day Average index, which identifies stocks above the 50-day moving average, reached a maximum point this week. In the past, this level has often anticipated a contraction. To get a more complete picture of the long-term situation, it may be useful to consult the index that uses the 200-day moving average as a benchmark. Again, relative highs were reached, indicating that this level led to a contraction in some past situations, but there have been cases where the technical overextension of the S&P 500 Index has reached even higher levels.

In addition, some classic oscillators could also be useful, as they can help the analyst identify some areas of graphic hyperextension. Identifying these areas does not necessarily mean identifying reversal points, but rather areas in which it can become convenient for trend traders to start taking profits, triggering the classic cyclical movements of the markets, characterized by ups and downs. The RSI (Relative Strength Index) is one of the main among these oscillators, and its application on a weekly timeframe could be very indicative of the technical moment that the market is currently experiencing. On a weekly timeframe, the 14-period RSI has reached the 66-point level, very close to 70, a zone many analysts use to identify overbought areas. It is important to note that in the past this has not always indicated the end of a strong trend. For example, reaching these levels in 2020 marked only the beginning of a megatrend that affected the US stock market in the following years.

Other useful indicators to understand what to expect from the S&P 500

Finally, it might be useful to examine the VIX, the volatility index most followed by traders on the US market. Volatility remains anchored towards the minimums, settling around the 12-point level, signaling a particularly technically calm period compared to the recent history of the financial markets. In 2021, the VIX hit a high of 80 points, at a time of extreme terror for the markets.

In this extraordinary geopolitical context, it might also make sense to look closely at another index that represents a beacon in moments of complexity: the DJT (Dow Jones Transportation Average). According to the Dow Theory, to confirm the health of the economy, both the industrial index (Dow Jones Industrial Average - DJIA) and the transportation index (DJT) must move in the same direction. If one of the two indices does not follow the other, it could indicate a possible trend change in the stock market. At this moment, probably due to geopolitical complexities, these two indices show a first sign of divergence, an aspect that seems to worry many experts in the sector.

Original article published on Italy 2024-01-18 08:01:00. Original title: Azioni USA, perché il mercato si aspetta nuovi (possibili) rialzi

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