Tech stocks are heading towards their worst December since the dot-com bubble burst two decades ago, as an optimistic outlook for a possible easing of the Federal Reserve’s (Fed’s) rate hikes fades amid signs of a stronger labor market.
Concerns are spreading even outside the tech sector. The S&P 500 index dropped by 1.5% on Thursday and by about 6% this month.
The data on the personal consumption expenditure (PCE) index will be released today. The PCE index is traditionally considered an indicator of consumer inflation. These data might support markets by reminding investors that consumer inflation has begun to slow down. Lower inflation would mean slower steps or even a pause in the Fed's rate hikes. However, the current slowdown in inflation doesn’t mean that it’s beaten in the long term. Inflation will decline due to the high base of the previous year, and at some moment next year we might even face deflation, or a year-to-year decrease in prices. At that point, the data on month-on-month inflation will be the most important for assessing the state of the economy. But right now, the markets will be happy to see at least some continued slowdown in inflation. Therefore, at the current point, after a slight sell-off in the stock market, the opening of long positions on the S&P 500 index looks preferable.
Also, keep in mind that the stock market is seasonable. The end of the year is often quite positive for the S&P. This phenomenon is called a Santa Claus rally. This positive period takes place in the last 5 trading days before the New Year and 2 days after the holidays.
According to Stock Trader's Almanac survey, the S&P has averaged 1.3% over the period mentioned above since 1950. At the same time, the index rose in more than 70% cases, which is a pretty high probability. Other surveys from Schroders showed that the S&P rose more moderately around 1% during the Santa Claus rally.
Technically, the S&P 500 index slowed down its fall at the Fibonacci level of 0.236 from the whole wave of the current correction. The current price has previously acted as support or resistance for the index. Now the index can rebound and rise to the next Fibonacci level of 0.382. There are located the downtrend line and the 200-day moving average. To overcome such a strong resistance, there is a need for strong growth drivers, which are missing so far. Therefore, our focus is the upside target of 3990 points for the index.
The stop loss is to be put behind the Fibonacci level of 0.382, which corresponds to 3762 points of the S&P index.
Rise of the S&P 500 index:
Take profit – 3990 points
Stop-loss – 3762 points