S&P 500: 2024

Opening Thoughts

Image Credit: Midjourney AI - The Bull Pool Party

At the close of 2023, all three major indices—the S&P 500, Nasdaq, and the Dow Jones—reached their peaks for the year. Notably, both the Nasdaq and Dow achieved new all-time highs.

Throughout 2023, the S&P 500 experienced two notable correction periods: the first from February to March with a decline of -9%, and the second in late summer from August to October, featuring a slightly steeper decline of -11%. Starting 2024 my analysis summarizes the current market conditions as being ripe for healthy correction to consolidate the record advance through the last two months of the year.

Housekeeping

A housekeeping note before progressing into the market thoughts.

It has been a pleasure to share on a weekly basis my thoughts and charts over the past 16+ months. Starting 2024, Lines On A Chart becomes a reader-supported publication. Thank you to the many readers that have already joined for 2024, and for all the readership through 2023— Happy New Year!

State of the S&P 500

The S&P 500 stands as the final major index to surpass its all-time highs. The remaining horizontal line linked to price history is at 4818—the intraday all-time high recorded two years ago on January 4, 2022.

Currently, the S&P 500 maintains robust health. In the chart’s lower panel is my preferred gauge of market breadth, Net New Highs. This metric reports the number of stocks reaching new highs versus those making new lows across the NYSE and Nasdaq markets. This measure of breadth has remains consistently positive during the best market rallies.

Given the prevailing positive sentiment across markets, stemming from the widespread advance since November, I speculate the likelihood of a healthy correction as the next probable move. To assess this, I will closely monitor market breadth, utilizing it as a key factor in evaluating the probabilities of whether the anticipated correction is likely to be healthy or potentially more severe.

A mere two weeks ago, the S&P 500 ETF SPY experienced its largest inflow ever. This encapsulates the current state of the S&P 500—a market teetering on the brink of all-time highs, with both retail and professional market participants joining with unwavering enthusiasm— the metaphorical “everyone is in the pool” moment.

Sentiment & Exposure Peaks Precede Pivots

The leading observation for my initial 2024 thoughts that the market is ripe for a healthy correction is the condition of market sentiment, and equity exposure.

For over a month now the CNN Fear & Greed Index has reported a market operating in greed, Extreme Greed for the last two weeks.

Source: CNN Fear & Greed Index

The NAAIM Exposure Index measures US equity exposure among active fund managers reported the highest reading for the year, the highest since November 2021. (The Nasdaq peaked in November 2021, and the S&P 500 just over a month later in January 2022).

Source: NAAIM Exposure Index

The following chart of the S&P 500 marks the relative peaks in sentiment and equity exposure using the CNN Fear & Greed Index (marked by red arrows) and the NAAIM Exposure Index (marked by blue arrows). It is a clear observation that the combination of excessive greed and elevated equity exposure have preceded all meaningful declines since the 2022 peak. I do not think it will be different this time.

To end last week’s note I summarized this chart as presenting a compelling argument for selling into greed— I still feel this way.

Momentum Interruptions

Momentum has propelled the market through the year, however this is recently being subtly being interrupted. In the lower panel of the chart is the Percentage Price Oscillator. This oscillator offers a quick insight into trend momentum. The red dots within the panel signify negative crossover events, a slowdown in momentum.

In my analysis, momentum interruption occurs when the initial negative crossover is not succeeded by a corrective price move. Instead, price continues to climb with successive negative crossovers, creating a pattern of interruptions. Based on my observations, the decline that follows such an interruption cycle tends to erase most of the earlier advance.

The previous instances of momentum interruptions in August 2021 and July 2022 exhibit an intriguing resemblance to the current scenario, with the index rallying approximately 5% as momentum decelerated. In both cases, the subsequent decline erased most of the earlier advance. A comparable outcome today would potentially bring the index down to 4550.

Outlook: Risk of Near Term Decline

In my analysis the immediate term has the signals flashing caution towards a 5% decline. If this scenario unfolds, the speculated decline will initially be favored as being one of health that sets the index up for an additional leg higher.

I speculate the correction will have the S&P 500 trade between 4500 - 4600 in the near term. Should this unfold, it will initially provide a healthy technical appearance where price revisits the breakout area.

2024 Reader Supported Publication

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Disclaimer: The information in this article is for informational purposes only and should not be considered financial advice or a recommendation for any investment. I am not a financial advisor, and the content is not intended to serve as financial advice. It is solely intended to journal thought, ignite more thought and discussion.