Investing.com — The S&P 500 index retreated on Friday, relinquishing gains from the initial surge of the ‘Santa Claus rally’ that had started earlier in the month.
According to a BTIG strategist, the rally in the index was rejected from the previous support trendline and even though there are still four days left for the Santa Claus rally to deliver gains, there are concerns over a “bigger January decline.”
At the moment, only 58% of S&P 500 components are trading above their 200-day moving average (DMA), marking the weakest reading for the year and ending a 265-day streak of stronger performance.
“While that was clearly a meaningful top, the four prior occurrences of such streaks were actually bullish medium-term, so not much of a clear-cut signal,” strategist Jonathan Krinsky said in a note.
Krinsky notes that the S&P 500 is also experiencing its first weekly sell signal since September, as indicated by the Weekly Moving Average Convergence Divergence (MACD), a trend-following momentum indicator. This shift in momentum does not necessarily predict lower prices, but it does suggest a change in the weekly trend.
Furthermore, high-beta momentum stocks have ceased their upward trend, prompting additional caution for such stocks in January, especially with the possibility of rotation and tax-selling.
In contrast, small-cap stocks, as represented by the iShares Russell 2000 ETF (NYSE:IWM), are still maintaining support around the 220 level. However, the lack of a strong rebound from oversold conditions is a cause for concern among market observers.
In the options market, the 20-day moving average of the equity put/call ratio is hovering at its lowest point in 18 months, indicating a level of market complacency that could pose a risk heading into the new year.
Meanwhile, the bond market is struggling to hold onto support after a challenging month. While there may be some rebalancing support into the year-end, the overall trend for bond prices is downwards, with higher yields anticipated.
According to Krinsky, a drop below 87 for the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) could lead to a gap-fill from November 2023 around $85, signaling further pressure on bond prices.