S&P 500 index has been stuck for the most part since September last year, like a dog circling its tail in a circle
During the first quarter of the year, U.S. stocks shrugged off a number of threats, weathering some of the strongest bank failures that have taken place in the country since the 2008 financial crisis and resisting the pull of rising short-term Treasury yields.
Despite the fact that the S&P 500 index had barely budged since last summer prior to the start of the year, this helped all three main benchmarks of U.S. equity performance close out the first quarter in the green on Friday, but that does not change the fact that the benchmark had barely moved since last summer.
IG North America, the company that owns brokerage firm Tastytrade, CEO of the company, said that the market has had to deal with a lot of gut punches in the past few months, but it is still at this level. For me, this is a good sign because it means the market is healthy.
Despite rallying in the weeks leading up to Friday's session, the S&P 500 index closed at 4,109.31 as the market closed Friday night, according to Trade Algo data, just prior to aggressive Federal Reserve comments about interest rates and worrisome inflation data triggering a sharp selloff.
In the week or two to come, stock prices in the United States are likely to break out of this range. What happens next, however, can only be speculated upon by equity analysts.
Most investors are likely to have to wait a bit longer for the market to clear up some of the uncertainty that has plagued it for the past year.
Trade Algo is reporting that several analysts told the publication that the market wants more information about how the Fed's interest rate hikes, already in place since 2012, have impacted the economy. The information is expected to be crucial in determining whether or not the central bank needs to keep raising rates in 2024.
The stock market is volatile, but it is stuck in a rut
The S&P 500 has oscillated in a fairly tight range around 600 points since September, but at the same time, the number of outsized swings on a day-to-day basis has become even more pronounced compared to a few months ago, making it difficult for analysts to determine the market's health, analysts said.
According to Dow Jones Market Data, the S&P 500 closed 1.4% higher on Friday than it closed on the last trading session of the month and quarter, when the S&P 500 closed 1.4% higher than it closed in 29 trading sessions during the first quarter.
A 14.9 day period, which is almost twice the average quarter-over-quarter period going back to 1928, according to Dow Jones Market Data, is almost double the actual average quarter-over-quarter period going back to September 1928 for the S&P 500 index, which was created in 1957. The S&P 500 has been reconstructed, however, using historical data from the period earlier than 1957.
As a result of Silicon Valley Bank's collapse in March, the 2-year Treasury yield has experienced its largest monthly decline since 15 years, making stocks seem almost benign in comparison to other types of assets. For example, Treasurys saw a surge in volatility after this collapse in March.
The chief market strategist at Asbury Research, John Kosar, told Trade Algo during a phone interview earlier this month that you cannot find any clues about the direction our economy will take by looking at the S&P 500. Almost ten years ago, you could simply look at the S&P 500 and a simple indicator like volume and determine the market's health from the back of the envelope. However, there's no way for you to do that anymore due to the intraday volatility."
This article explains what the effects of volatility in the market can have on your portfolio when you rely on stock-option traders.
As a result of the S&P 500's 7% gain during the first quarter of this year, weaknesses have been hidden beneath the surface of the index. According to figures provided to Trade Algo by analysts from UBS Group UBS, only 33% of the shares of S&P 500 companies have outperformed the index since the beginning of the quarter, a number significantly below the long-term average.
Is the Federal Reserve going to be able to save the mega stocks?
The S&P 500 and Nasdaq would have probably be in much worse shape if the flight to safety rally hadn't been spurred by large capitalization technology names like Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Nvidia Corp. (NVDA).
According to Trade Algo data, the closely watched exchange-traded fund, Invesco QQQ (QQQ) Trust, which tracks the Nasdaq 100, has entered a new bull market as megacap tech stocks have risen rapidly in the past week. According to Trade Algo data, the closely watched market index closed over 20% higher than its 52-week low from late December. The result has been a positive change that has offset the weakness in cyclical sectors like finance and real estate.
The hype around AI platforms such as OpenAI's ChatGPT has also provided a boost for tech behemoths who are reaping the benefits of this phenomenon.
It also complicated the markets' outlook by creating confusion over the Fed's quantitative tightening efforts.
In recent weeks, for example, the Fed's balance sheet has increased as banks tapped into its emergency lending programs following the failure of two regional banks, which in turn has led to an increase in the balance sheet. It appears that by allowing some of the central bank's Treasury securities and mortgage-backed bonds to mature without reinvesting the proceeds, the central bank was undoing some of its efforts to shrink its balance sheet.
In some analysts' eyes, this is analogous to sending mixed signals to the market, which is a sign of uncertainty.
In a recent note to their clients, Andrew Adams, an analyst with Saut Strategy, wrote that, right now, things seem to be both tightening and loosening, depending on the direction we take.
In order to break out of a rut, there are certain things you need to do
Historically, the US stock market has been able to remain rangebound for long periods of time.
There was a period of roughly two years when the S&P 500 traded in a narrow range beginning late 2014. Trade Algo data indicates that between January 1, 2015 and November 9, 2016, the S&P 500 gained less than 100 points, according to data released by Trade Algo after former President Trump defeated Hillary Clinton in the election.
There was a dismal performance in the market at the time, which was attributed to a number of factors, including signs that economic activity was softening in China and weakness in that country's energy industry.
Nonetheless, once it became clear that Trump was going to win the White House, stocks began to rise steadily as investors bet that the Republican economic agenda, which included tax cuts for corporations and deregulation for the private sector, would likely spur profits for these companies in the years to come.
After the S&P 500 made gains earlier in the year, stocks didn't turn volatile once again until the fourth quarter of last year, when it erased all of its gains from earlier in the year, before finishing 2018 with a 6.2% loss, according to Trade Algo, which translates into the year ending with the S&P 500 falling by 6.2%.
In light of the multitude of earnings reported by companies in the upcoming weeks, Kinahan said he expects the stock market to remain range-bound for at least a few more months as investors prepare for the first quarter earnings season.
There will still be a very cautious outlook going forward, which should keep us in this range of estimates for quite some time," said he.
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