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Technical Oversold Rally or Another Consolidation?

Stocks rebounded soon after the Fed Chairman Powell less hawkish comments at today’s Senate Banking confirmation hearing for a second term. Powell assured the banking panel he will bring inflation under control. Chairman Powell also stated the asset purchase will end by mid-March and will soon see some balance sheet runoff during 2022.


The comments were more dovish than several Fed policymakers who favor aggressively cutting the balance sheet soon after the first Fed rate hike in March 2022.


The street will turn to the December CPI, which will be released early tomorrow morning. Economists expect CPI to show a 0.04% gain, or 0.5% ex-food and energy. The overall consumer inflation number can hit a high of 7.1%, rising from November’s 6.8% level. Core inflation will also rise to 5.5%, up from the previous month of 4.9%.


Stocks rallied today, with the SPX Index gaining 0.92%, Dow Jones Industrial Average rallying 0.51%, and Nasdaq Composite Index jumping 1.41%. The 10-year US treasury yield slipped to 1.91% after trading at an intraday high of 1.81% yesterday. WTI Crude Oil also gained 2.99 or 3.82%.


Is today’s action an oversold rally or another consolidation?


Wide dispersions in the past few weeks warn at changes in the economic cycle, interest rates, or investment sentiments. A shift in the economic phase to a mid-cycle recovery/expansion can lead to numerous sector rotations and an increase in stock selectivity. Higher interest rates can also trigger a reallocation of funds to favor interest-sensitive and value-style assets. Market sentiments can also change quickly and frequently, forcing a rebalance of investment portfolios between high-beta and low-beta income investments.


The intermediate-to-longer term trends remain favorable for most major US indexes. Respect the primary uptrends, as they will likely resume once the consolidations have played out. However, markets show mixed technical readings over the near term. Some markets are stronger than others, suggesting investors and traders are sectors and stock selective.


A technical review of US indexes, including SPX, INDU, NYA, COMPQ, and NDX, reveals some undergoing consolidations, others are nearing breakouts, and some are in near-term distributions.


Enclosed below are key near-term technical levels to monitor.


Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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