Is US Stock Market Primed for a Year-End Rally?

Influencing Factors in the U.S. Stock Market

Investors attempting to analyze the trajectory of the U.S. stock market could note technical and seasonal pointers indicating a potentially timely investment, with solid historical evidence underscoring a market surge towards the year-end as per market tradition. Nevertheless, factors such as looming inflation data and impending third-quarter earnings may yet unsettle Wall Street.

The S&P 500 has so far seen around a 5% dip since its peak in late July, but August has thus far seen a bounce back in the index. Those specializing in technical analysis posit the upturn could persist. They indicate stocks that potentially have been oversold and offer historical proof of a typical year-end equity surge as evidence.

Potential Hurdles

It’s not all smooth sailing though, numerous reasons persist to tread lightly. Certain analysts express anxiety about a small cluster of gargantuan stocks leading this year’s gain in the S&P 500, blurring the prospect of a continuous wider market rally.

Investors are on edge over the course of interest rates as steered by the Federal Reserve, further impacted by this Thursday's upcoming U.S. consumer price report. Third-quarter earnings season due to kick off on Friday presents another unpredictable factor that will assist in determining whether companies can validate this year's increased valuations.

An Optimistic Outlook

Ed Clissold, Ned Davis Research’s chief U.S. strategist, stated, "A large array of evidence supports an end-of-year rally prediction," but added, it needs verification whether the market has embarked on a prolonged topping process.

Market responses to events such as a spike in monthly jobs that alarmed many about an overheated economy, and troublesome incidents in the Middle East, were encouraging to analysts.

Positive Indicators

A promising indication is that the S&P 500 has managed to stay above its critical 200-day moving average, acting as a potential buffer. Recently, the S&P 500 was slightly above its 200-day moving average.

Chief technical strategist for LPL Financial, Adam Turnquist highlighted the unusual event of the index remaining above the 200-day moving average while more than 20% of the index's stocks were classed as oversold. This suggests a positive price correction may be anticipated.

End-Of-Year Trends

The year-end trend has generally seen stocks perform positively, with the months of November and December often realizing the second and third highest average S&P 500 monthly gains. This year's trend may look even more promising.

The Bearish Sentiments

The general feeling in the market has shifted to a more bearish sentiment with the latest decline in stocks, with the weekly AAII survey showing 41.6% bearish and 30.1% bullish investors. An increase in bearish sentiment typically serves as a contrary indicator for stocks hinting at the opportunity for sidelined investors to make positive strides.

However, indicators like the AAII do not adequately reveal the degree of pessimism, which would be clearer if the gap between bullish and bearish sentiment was larger. A statement backed by Willie Delwiche, an investment strategist at Hi Mount Research.

Outlook Moving Forward

Even should the market rebound in the near future, Delwiche cautioned that without a switch in direction leading to more stocks achieving new highs compared to new lows, it could result in a fleeting oversold rebound with no real substance.