Stocks have lost their short-term bullish momentum, and now the market seems stuck in a longer-term downtrend with no end in sight. Many market strategists expect the S&P 500 to aim to retest lows in the first quarter as earnings look weaker, recession fears rise and the Federal Reserve continues to tighten policy. Strategists looking at the charts have a similar view. They are watching the S&P 500 as it trades below its 200-day moving average after briefly breaking above that threshold. The 200 day is a closely watched momentum indicator, reflecting the average of the last 200 closing prices of a security or index. When the index crosses above, it is a sign of positive momentum. The S&P 500 topped the average on Nov. 30 and fell below on Monday. The 200-day is now at 4,040 for the broad market index, and the S&P 500 closed at 3,933.92 on Wednesday. A loss of short-term momentum “I think the real story is in the downturn, we are losing short-term momentum. The short-term relief rally has seemingly lost its grip,” said Katie Stockton, founder from Fairlead Strategies. “We all have different ways of measuring these things. For me the downtrend is intact and just partly because it has a lower high.” Stockton said its indicators showed the S&P 500 reversal on Tuesday. Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, said he was positioning himself to stay out of the decline. “While the index edged above its 200-day moving average and the magnitude continues to expand, the downtrend from the start of the year remains in place,” Wilson wrote. “It makes the risk-reward of playing for more upside pretty poor at this point, and we’re selling again.” Wilson said his tactical range was 4,000 to 4,150, and the S&P 500 traded within that range last week. Chris Verrone, head of Strategas’ technical and macro research team, said he saw another test of the lows approaching. He also doesn’t expect the usual positive December seasonality to work out so well this year. “If you go into December in a hole, don’t expect to be bailed out,” he said. “I haven’t been convinced all year that we’ve had that flush moment, that ‘you don’t want to get out of bed’ moment. I suspect that’s still ahead of us.” Verrone said he expects the current range top to be between 4,200 and 4,300 for the S&P 500. “It’s hard to get below 3,400, 3,500,” said Verrone. he declared. “I still think that’s the low end, and I wouldn’t be surprised if we saw it again. There’s something wrong right now, and I think the banks are telling us that.” Notable weakening in other corners of the market Verrone said banks have started to underperform recently. “They know something, and that’s enough for me to pass away,” he said. “They lagged the rally and now they’re falling more, as the market declines. There’s something up there. The market seems uneasy with something.” Verrone also notes that bond yields have fallen in recent days and the tech still can’t get a bid. “I think in markets like this, ownership is your enemy. Where is the most ownership still? It’s in names like Apple. There’s a security hazard,” did he declare. Fairlead’s Stockton said she put a sell-off on the financials on Wednesday. It is now overweight defensive sectors that show relative strength. That would be consumer staples, health care, and utilities. Indeed, the S&P 500 financials sector is down 4.8% for December, while consumer staples and utilities are down more than 1%. Health care is down 0.4% for the month. Morgan Stanley strategists are eyeing the same areas. “As a final note in this regard, we expect inflation to fall rapidly in 2023. Although this cut will allow the Fed to pause as early as January, equity investors should be careful that they wish,” Wilson of Morgan Stanley wrote. He added that falling inflation was also part of a negative thesis, which underpins his earnings forecast well below consensus.
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