A growing number of observers are concerned the stock market has gotten ahead of itself as trading begins in 2024. Stocks are coming off a surprisingly strong year, with all three major averages netting double-digit gains in 2023. The S & P 500 registered nine straight winning weeks as the year ended, an advance that the broad market index hadn’t accomplished since 2004. Whether looking at the 50- or 200-day moving average price, there have been only four other years in the past 70 when the S & P 500 ended the year with a longer streak of overbought readings, according to Bespoke Investment Group. Last year ended with the S & P 500 overbought for 32 consecutive days, the researcher said. But those gains also have other investors concerned that equities are overbought, and have maybe borrowed from the future. Stocks opened lower to kick off the first trading day of 2024, extending a loss that started on the final trading day of 2023 and sending the S & P 500 down as much as 0.82% early Tuesday. That followed a Barclays downgrade of Apple that had traders fretting about the health of the Magnificent Seven stocks that drove so much of last year’s big gains. .SPX 1Y mountain S & P 500 “The stage is set for a pullback,” Canaccord Genuity’s Tony Dwyer wrote on Tuesday. “The tactical set-up in late October, coupled with the Fed’s ‘dovish pivot,’ has led to a market surge that may now be put to the test,” the strategist wrote, referring to the central bank’s December policy meeting. “Even … those of us who expected a rally off the October lows have been surprised by the extent of the gains,” Dwyer continued. Dwyer said the S & P 500 now is in “extreme overbought” territory, a reversal of market conditions in late October 2023. Volatility is set to spike, and 10-year U.S. Treasury prices look extremely overbought, he said. Dwyer expects stocks could get their first major test this Friday when the December jobs report comes out. In fact, Dwyer says investors should stick to the sidelines for now, though he is less certain on the intermediate outlook for equities. “The surge in the breadth of the market suggests not betting against the upside over the intermediate term, while the extent of gains and tactical setup suggest not chasing it near term,” Dwyer wrote. “In short, we don’t need to figure out the rest of the year right now; we just need to see how the market responds to the current set-up.” Other strategists are also bearish about the immediate outlook for stocks. Wolfe Research’s Chris Senyek said a 5% to 10% pullback could be in store for the S & P 500, saying he’s still not a believer in the outlook for stocks despite the recent “melt up.” From the 2023 close around 4,770, Senyek’s call would equate to the S & P 500 falling to between roughly 4,292 and 4,530, respectively. The broader index most recently at about 4,744 midday Tuesday. “From a near-term perspective, all major U.S. equity markets continue to look overbought (e.g., RSI ), and our sense is that it won’t take much to spark a 5% to 10% drawdown,” Senyek wrote Tuesday. “The bigger intermediate-term question is whether momentum (e.g., MACD ) will sustainably shift to the downside.” Senyek warned that investors are underestimating the impact of the Federal Reserve’s shrinking balance sheet through its qualitative tightening program, which will soon weigh on equities and all risk assets. To be sure, however, other market observers remain optimistic, though they don’t anticipate 2024 will bring the same rally as in 2023. Following an annual gain of 20% or more, the S & P 500 rose 80% of the time the next year, according to CFRA Research’s Sam Stovall. On average, the broader index netted a 10% gain, “showing that good years tend to follow great years with an above-average return and frequency of gain,” Stovall wrote Tuesday. Bespoke similarly agreed that investors need not be fearful of a sell-off after the recent rally, even with some overbought conditions. “[As] strong as the rally to close out 2023 has been, there is no historical evidence to suggest that it is borrowing from the future,” read a Dec. 29 note from Bespoke. “That doesn’t mean that we necessarily have to rally to kick off the year, but we also shouldn’t assume that the market has one arm tied behind its back either.”
Growing worry on Wall Street that the stock market is way ahead of itself as 2024 begins
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