Last week’s trading might be best defined as the lost week for the SPX
“…the SPX comes into the week below short-term levels of support that I identified last week, specifically the 20-day moving average that checked a pullback in mid-November. The index is also below the November 11 high that I suspected could be supportive after it was taken out earlier this month. As such, the short term could be choppy, with this potential support now representing potential resistance looming overhead in the SPX 6,000-6,010 area.”
-Monday Morning Outlook, December 23, 2024
In a sense, last week’s trading might be best defined as the lost week, with Friday’s S&P 500 Index (SPX—5,970.84) low wiping out the gains from the three previous sessions. In fact, per the excerpt above, the index mostly pinged between support and overhead resistance areas, as discussed last week.
Friday’s selling occurred after buyers could not push the SPX through its opening level on Dec. 18, the same day the Federal Reserve reduced rates. A sharp selloff ensued when Federal Reserve Chairman Jerome Powell indicated that current policy is now significantly less restrictive and indicated caution will be taken when considering rate cuts in the future.
Nonetheless, the SPX managed to find support at its 50-day moving average at Friday’s low. At the end of the prior week, the index had barely closed back above this moving average, which was used as support in early November after a short-term decline.
As such, the technical backdrop has not changed much from last week, when I concluded that the short-term could be choppy. That is, with the flattening 20-day moving average in the vicinity of the mid-November highs in the 6,010-6,020 area and last week’s high at 6,040, all presenting technical resistance.
Multiple levels of support reside just below, starting with the 50-day moving average, which comes into the week at 5,940. Below that is the 5,870-5,880 area, home to the mid-October high before a short-term pullback and the mid-November lows. Finally, the off-the-radar (but sometimes important) 80-day moving average is at 5,845.
The big negative reaction to Powell’s outlook two weeks ago is slowly wringing out some of the extreme optimism that was evident among some market participants going into the December Fed meeting.
For example, the National Association of Active Investment Manager’s (NAAIM) weekly survey showed a reading of 99.2 the week prior to Feder Open Market Committee (FOMC) day on Dec. 18, with 100 representing fully invested. The latest reading was down to 80.4.
Equity option buyers on SPX components were the most bullish in years ahead of that Fed meeting, with the 10-day, buy (to open) put/call volume ratio on SPX components reaching 0.42. This ratio is still low, however, and working its way higher from a multi-year low, per the chart immediately below.
The risk to bulls is a gradual and sustained increase in put buying relative to call buying on equity options, as active investment managers decrease their allocation to equites like they have the past two weeks. This risk increased after the SPX’s break below short-term support levels.
A continued unwind of optimism among these market participants could create a coincidental headwind for stocks. This could push the SPX below intermediate-term levels that have so far been supportive.
The great equalizer in the sentiment discussion continues to be the shorts, who continue to be active despite multiple new all-time highs in 2024. Last week the exchanges reported short interest data on individual stocks through Dec. 15.
Per the chart below, short interest on SPX component stocks increased nearly 5% in the first half of December and is now at the highest level since 2018. Even with the SPX up about 25% this year, short interest on component stocks is up nearly 20%. This means this year’s theme of a highly-shorted market will continue into 2025. Whereas the market rallied amid a build in short interest in 2024, might we see short covering in 2025 pave the way for the bull market to continue? Stay tuned.
Meanwhile, we wish you and your families a Happy New Year! I look forward to guiding you through the various twists and turns of the stock market as we move through 2025.
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