A Concerning Stock Market Development
Despite widespread optimism, the U.S. stock market failed to deliver a strong Santa Claus rally and is now undergoing a technical breakdown.
Since President-elect Donald Trump’s victory in the U.S. presidential election in November, economic optimism has surged across the country. The stock market climbed in the weeks that followed, though not to the extent one might expect given the heightened optimism. Wall Street had high hopes for a Santa Claus rally, but those hopes were dashed just a week before Christmas on December 18th.
On that day, the Federal Reserve cut its benchmark lending rate by 25 basis points as expected but signaled a slower pace of future rate reductions, which weighed heavily on investor sentiment. As a result, the S&P 500 dropped 3.05%, while the Nasdaq 100 declined 3.64%. As the new year begins, signs are emerging of a technical breakdown in stocks, warranting close attention.
Following an initial surge in response to the U.S. presidential election, the S&P 500 gradually climbed to new all-time highs. However, it peaked and declined sharply on December 18th. For the past few weeks, the S&P 500 has been struggling to remain above the 5,900 to 6,000 support zone. On Friday, it started to breach this zone to the downside. I’ll be watching for additional confirmation, such as a continued breakdown on strong volume. If that occurs, it would signal a higher probability of further downside.
The Nasdaq 100, bolstered by high-flying tech giants known as the Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla), outperformed the S&P 500 following the election. However, it has also experienced a sharp sell-off since December 18th. Currently, the index is hovering just above the 20,750 to 21,000 support zone. A bounce off this level would be an encouraging signal, but a decisive close below it on strong volume would likely indicate further downside ahead.
The Magnificent 7 exchange-traded fund (symbol: MAGS) has shown strong performance over the past two months but has recently pulled back. The $50 level serves as a critical support to monitor. Holding above this level would be a positive sign, but a decisive close below it would signal further weakness for both the Magnificent 7 stocks and the broader U.S. stock market.