Seasonality. We traders and investors like to make some sense of the chaos and randomness seen in markets. One way to do so is by looking at seasonality, which looks back at how an asset performs during either a season (natural gas does well in winter), or how an asset typically performs during a month.
After many decades of data, this is how the typical returns in stock markets on a monthly basis looks like:
The last few months of the year tend to be some of the strongest, hence why a year end rally has garnered the name, “Santa Claus Rally”. However, this year, a year end rally is definitely under threat.
It all began with the Federal Reserve last week. Many were expecting a dovish Federal Reserve, who would initiate a ‘pivot’. Instead, we got the message of higher interest rates for longer, with the Fed seeing the terminal rate higher at 5.1% (rate hikes up to 5.25%), and no reduction until 2024.
Stock markets did not like this.
We told readers on Market Moment that all the major US markets were testing major support. Even the leading index, the Russell 2000, confirmed a breakdown and its retests failed, increasing the probability of markets heading down lower.
Starting off with the S&P 500 and the Dow Jones, both markets have confirmed a localized high. Both indices have confirmed a reversal pattern known as the head and shoulders. Unless the necklines I have drawn out at 3930 for the S&P 500, and 33,300 for the Dow Jones are taken out, the new downtrend continues with targets at recent lows of October 2022.
Once again, if markets move up they will be treated as just pullbacks in the downtrend UNLESS those neckline zones are taken out. We do tend to see pullbacks up to the breakdown zones which allows traders to jump in short.
Tech stocks are getting hit more due to higher interest rates. There are a few charts that I see plunging such as Tesla, which will likely see the Nasdaq break below recent lows and could indeed confirm new 2022 lows just before the year ends.
Adding more pressure to stocks will be impending recession. High interest rates are now impacting the economy. If people spend less, then the next corporate profits will be missed. Earning season could be a bloodbath which means stocks and markets fall lower. Keep an eye on Christmas spending data.