The US stock market is currently experiencing a state of fear at the beginning of the year, a stark contrast to the balanced sentiment of greed and extreme greed from a year ago. This shift in market sentiment is reflected in the CNN Business Sentiment Index, indicating a cautious approach among investors.
One of the key factors contributing to the pressure on markets in December was the change in Fed rhetoric, with Chair Jerome Powell’s speeches and official FOMC comments hinting at fewer rate cuts in the future. Consequently, the likelihood of a rate cut at the end of January has decreased to around 10%, with markets now pricing in a 50-point rate cut as the central scenario for year-end.
The Federal Reserve’s more hawkish tone has played a significant role in the 3.5% decline of the S&P 500 from its December peak. While low levels of fear and greed in the market attracted buyers last year, there is still a sense of caution among investors given the current market dynamics.
The first few days of trading in a new year are often viewed as indicators for the entire year, known as the “first five-day rule”. This emotional start to the year can heavily influence traders’ behavior and set the tone for market sentiment going forward.
In terms of technical analysis, there are concerns as the S&P 500 failed to break above its 50-day moving average on the first trading session of the year. Similarly, the Nasdaq 100 and the Dow Jones also struggled to break above their moving averages, indicating potential weakness in the market.
Given the current market conditions, we may see a test of the 200-day moving average soon, which could signal a long-term trend shift. In August, the market rebounded as it approached this level, supported by the Fed’s easing policies – a contrast to the current scenario of a less dovish Fed and slowing economic growth momentum. However, a reversal in growth trends in the coming days could potentially restore bullish confidence for the new year.
