To The Moon

We have seen how $DJIA(.DJI)$ and $S&P 500(.SPX)$ went to a record highs in 2023 when the market went on a 2-month rally sprint to finish off 2023 with a significant advance.

But as I have shared my prediction on these 3 indices earlier, I am concerned that the market might not enjoy the “January effect” instead we could see traders and investors rushed to lock in the gain where S&P 500 has risen 24% in 2023. If that happen we might see market suffer a derail of what would be expected of a market rally.

From the SPX 50-day MA period, it is currently trading well above the level, so it could mean the possibility of profit taking resulting in a sell-off might be possible, at least for first 2 weeks of January.

On top of that, we could have high valuations, economic data and geopolitics putting the market rally in January to a pause.

RSI Show That U.S. Stocks Already Overbought In December 2023

Using the technical gauge (RSI - relative strength index), we can see from the chart below that U.S. stocks in S&P 500 are overbought for most of December 2023.

The 14-day relative strength index on the S&P 500, showed that it climbed as high as 82.4 on 19 Dec 2023, its highest since 2020.

Although the RSI has since pulled back, but it is still hovering around 70, which are still considered "overbought."

Investors Sentiment Has Change Signal Market About To Turn

According to the American Association of Individual Investors' weekly sentiment survey, investors have gone from incredibly bearish to incredibly bullish within a period of just 2 months. When sentiment becomes stretched in either direction, it can signal that the market is about to turn. Investors say that is what happened back in July, and also in October after the S&P 500 touched its 2022 bear-market nadir.

According to the AAII survey (20 Dec 2023) published ahead of the Christmas holiday, nearly 53% of respondents said they were bullish, the highest since April 2021. That number came down a bit this week, but it remains high relative to levels from October.

Bullish sentiment, expectations that stock prices will rise over the next six months, decreased 6.6 percentage points to 46.3% recorded as of 27 Dec 2023.

Optimism is back in its typical range for the first time in three weeks. Bullish sentiment is above its historical average of 37.5% for the eighth consecutive week. (Optimism was 36.0% during the survey's first week on July 24, 1987.)

Cboe Volatility Index VIX Extremely Low - Something To Worry

Cboe Volatility Index VIX, which is commonly known as Vix is used to measure implied volatility, or how volatile traders' expect the S&P 500 to be over the coming month based on trading activity in options contracts tied to the index.

This “fear gauge” is showing a very positive signal and this might raise some concern for worry. In December 2023, the Vix dropped below 12 for the first time since before the advent of the COVID-19 pandemic.

This would mean that market could be over optimistic about the rally and what lies ahead.

Progress on inflation could stall in January

As the next U.S. inflation report is due on 11 Jan 2024, some investors are already looking forward to this report.

According to the Cleveland Fed's inflation nowcast has core CPI rising more than 0.3% in December. If this tally with what we will be expecting on 11 Jan 2024, then this would mean we have the highest inflation reading since May 2023.

Even if core inflation did come in lower and slightly cooler, will the market react with a rally to a cooler inflation. We are hoping that U.S. CPI for December will continue to show a disinflationary trend, but it does not mean that the market will continue to rally like how it did previously?

Summary

There are other factors that might pause or even stop a rally that we are seeing from 2023, but what I have just shared are factors I personally think we can look out for as we trade the market.

There could be investors sentiment high favourable to certain industry but do remember that there is also risk of profit taking since investors might anticipate a pause in rally before major announcement like CPI for December.

There are also earnings seasons coming up for Q4 2023 happening in January 2024, this might be something that could move the market either way.

Appreciate if you could share your thoughts in the comment section whether you think overconfidence investors sentiment and Vix too low should be a concern to whether we will face a surprise in early 2024 and put a pause to the rally from 2023..

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.

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