Stocks and bonds (prices) surged in November on encouraging inflation reports and interest rates falling. Everything from growth and technology names to small and mid-cap stocks has rallied sharply on expectations the Fed can achieve a soft landing by successfully cooling the economy without triggering a deep recession.
For November, the S&P 500 Index (SPX) has gained 10.52%, INDU (+8.99%), COMPQ (+12.64%), NDX (+12.56%), Mid (+9.89%), and SML (+9.47%). The 10-year Treasury yield (TNX) has also fallen from a high of 4.997% (10/23/23) to a recent low of 4.365% (11/22/23).
With record balances in money-market funds and investors plowing cash back into stocks and bonds, many are optimistic there will be more gains into year-end.
According to the Investment Company Institute (ICI), cash levels or total money market fund assets increased by $29.12 billion to $5.763 trillion for the week ending on 11/21/23, or an increase of 0.50%. The bulk of the increase occurred within Government funds ($22.34 billion), followed by Prime ($5.99 billion) and Tax-exempt ($0.80 billion).
Interestingly, small and mid-cap stocks, which trailed their large-cap counterparts over the past year, have begun to narrow the performance gap. Since small and mid-cap stocks are more sensitive to higher interest rates, does this imply inflationary pressures are subsiding and interest rates normalizing?
Will the high cash level and the recent strong price momentum in stocks and bonds be a potential tailwind into the seasonal strength period?
Investors will continue to assess comments from Fed officials for changes in the central bank’s narrative on inflation and the economy. Additional economic and sentiment studies, including the consumer confidence survey this week, will offer clues as to whether the Fed will cut rates in the future.
In the meantime, turning to the shorter-term charts of SPX may offer guidance in managing near-term upside potentials and downside risks in the stock market.
Technically speaking, the ability to clear above the October high (4,393.57) coupled with the reversal of the July 2023 downtrend channel (4,394) and a breakout above the 61.8% retracement (4,415) from July to November 2023 decline reaffirm the 10/27/23 low (4,103.78) as another market bottom and a higher low.
The breakout above 4,393.57 (11/10/23) hints at +289.79 points or 4,683.36. Also, a breakout above 4,393.57 suggests +322 points or an SPX target at 4,716. The November 2021 and January 2022 all-time highs (4,744/4,819) remain pivotal intermediate-term resistances.
On a near-term basis, an overbought condition is developing into the late October to November rally. The SPX rally to 4,568.43 (11/22/23) may be stalling near the 8/23/23 gap-down (4,550.93-4,567.53). Also, the reaction high at 4,607.07 provides formidable resistance.
Failure to surpass resistance warns of consolidation toward initial support at 4,422-4,458 (11/14/23 gap-up) and 4,393.5-4,394 (extension of the July 2023 downtrend channel breakout and the 11/10/23 breakout). Additional secondary support remains at 4,320-4,347 (11/3/23 gap-up, July and August 2023 lows, and 50-day ma) and below 4,245.5-4,277 (11/2/23 gap-up and the 200-day ma) and 4,103.78/4,072 (10/27/23 reaction low and the bottom of the July 2023 downtrend channel).
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