During 2022 the U.S economy suffered the highest inflation rates in 40 – years. The prior high inflation era lasted from 1968 to 1980, it’s likely the current cycle could continue for at least several years. The FOMC has been aggressively raising short – term interest rates and are likely to continue raising rates. The rate increases could already be affecting the U.S economy and stock market.
Using economic fundamental analysis there’s a high probability the U.S economy could contract in 2023. Using technical analysis, the U.S stock market also looks like it could contract. On 12/13/22 the S&P 500 (SPX) made a double top after briefly moving above two resistance levels. Subsequently the SPX declined 7%. The next course of action appears easy, sell/short stocks on the next rally.
Be careful markets rarely make it easy.
The daily SPX chart courtesy of Trading View illustrates what happened in 2022.
On 12/13/22 the SPX moved above the 200 – day moving average (MA) and 1% above the declining trendline from January 2022. It appeared the breakthrough was decisive, however it only lasted one – hour and the SPX peaked very close to the high made on 12/01/22. The bears took advantage of the double top and successfully drove prices down.
In retrospect the action on 12/13/22 now appears be a top in the general area of the 200 – day MA, and the trendline, with a specific peak matching the 12/01/22 top.
Obviously an important peak that could signal the start of a multi- month decline. However, evidence from the sentiment dimension suggests something else could be happening.
As noted in the 12/28/22 blog “Curious Sentiment Spikes – Part – Two” on 12/21/22 the Put/Call ratio spiked up on a SPX 1.8% rally. Then the highest Put/Call ratio in more than two years occurred on 12/28/22.
Sentiment has gotten too bearish too soon. The recent high Put/Call readings are what you would expect after a two- month – 20% SPX decline. The drop from 12/13/22 to 12/22/22 was 7% in seven trading days.
The majority of big money stock traders will likely return on the first trading day of 2023 – 01/03/22. The actions they take in the first few trading days of 2023 could determine the direction of U.S stock for at least the next several weeks.
If the SPX moves up in the first few trading days of 2023 the area near SPX 4,030 could be very important. If the SPX can move and hold above the declining trendline, it could be the panic point for the bears. Short covering could ignite a rally to SPX 4,400.
To all a Happy and Prosperous New Year!