According to February, Stock Trader Yearbook 2023, which tends to be a weak month, especially in the years before elections. Now that February is over, does that mean the worst is over? Not necessarily. Each year has its own scenarios and challenges. This year, all other things being equal, there is great concern that the Fed’s attempt to contain inflation will not work as planned. Recent economic data has sent mixed messages, making it difficult to determine the direction of the stock market.
Stock market with holding pattern
Earnings season is coming to an end, and estimates are generally down from last year. February’s Consumer Confidence Index also fell short of expectations. The Case-Shiller National Home Price Index for December also showed a slowdown in home prices. The Manufacturing Purchasing Managers Index was 47.7% in February, slightly below expectations. Readings less than 50% indicate shrinkage.
None of these data moved the market significantly. Inflation is still well above the Fed’s 2% target. The stock market will probably continue to rattle until there is some certainty about how prices will move. There is talk of a potential terminal rate of 5.4%, higher than the 5% a month ago. It’s a similar story across the pond, with an expected ECB terminal rate of 4% by early 2024.
Given the volatile macroeconomic backdrop, how long will it be before we see tailwinds or headwinds that could upset the market’s holding pattern? Given that it doesn’t, it could still take a few weeks. And in the stock market, it feels like an eternity.
Technological perspective of the stock market
Looking at the daily chart of the S&P 500 Index ($SPX), we see some interesting things (see chart below). Note: Click the chart to see the live version.
- The S&P 500 is in an important area. Close to the 200-day moving average. Support; the index may bounce off the support and move further sideways until certainty surfaces. When that happens, it can break out above or below the trading range.
- If the S&P 500 breaks below the 200-day moving average, the next support level could be the 50% retracement level from the August high to the October low. This brings the S&P 500 to around the 3,900 level.
- The downtrend that started on February 2nd remains intact. If the price bounces off the 200-day moving average and breaks out of the downtrend trendline, the market is likely to trade flat between 3,940 and 4,000. Conversely, if the S&P 500 falls, the downtrend is likely to continue.
Market Width Indicators: Catch a Clue
It may be helpful to monitor the market width indicator to see if there are any changes in investor sentiment. Are investors getting more bearish? What about institutions?There are several market width indicators Includes up/down indicators, bullish percentage indices, percentage of stocks above moving averages, and more available on the StockCharts platform. Some of these indicators show the width of the market as a whole, but you can also focus on the width of a particular sector, industry group, or index.
The 1-year daily chart of the S&P 500 Index below displays the McLellan Oscillator in histogram style and the S&P 500 Bullish Percentage Index. Unsurprisingly, both indicators show negative ranges. The Federal Reserve says the disinflationary process has begun, but inflation remains hot, the labor market is strong and the economy appears to be growing more slowly than expected.
McClellan Oscillator and Bullish Percentage Index It may remain in negative territory for some time. Both can be used to identify sentiment reversals. This could indicate a potential reversal in an entire market, sector or industry group.
- McClellan Oscillator. The ratio-adjusted McClellan Oscillator ($NYMO) shows more stocks going down than going up. Notice the signs of divergence between the S&P 500 and the histogram bars.
- Bullish Percentage Index. Usually, a Bullish Percentage Index below 30% can indicate very bearish sentiment. The S&P 500 has yet to reach that level, but it is below the 50% threshold, which is a bearish sign. Approaching December’s 41.82 level. This could coincide with the S&P 500’s 50% retracement level of 3907.
Be prepared for any scenario
The next jobs report could provide further clues about the state of the economy as a whole. But it won’t be him until March 10th. Until then, stay involved in the market. There’s no better time to pull out your favorite indicators and perform different “what-if” scenarios. The charts provided in this article are a starting point, but explore other indicators and set up his ChartList of “Holding Patterns” markets, then scroll through those charts to see if anything pops out please. By the time the Federal Reserve makes its next interest rate decision, we may start to see the wind blowing in some direction.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. Any ideas or strategies should first be evaluated by your own personal and financial situation or by consulting a financial professional. Do not use without
Jayanthi Gopalakrishnan is the Director of Site Content for StockCharts.com. She spends her time coming up with content strategies, providing content to educate traders and investors, and finding ways to make technical analysis fun. Jayanthi was editor-in-chief of T3 Custom, her marketing agency for financial brands. Prior to that, she was Editor-in-Chief of Technical Analysis for Stocks & Commodities magazine for over 15 years.learn more