It’s been a tough week for equity markets compared with the easy and frequent gains of November and December when the S&P 500 gained around 16%.
Wall Street is facing its first weekly loss after nine-straight gains, leaving traders anxiously speculating about the future – whether this signals further losses or a resurgence of the rally.
Traditionally, the “Santa Rally” often extends into January, typically a favorable month for stocks. Although we’re just a week into the month, so there’s still potential for a positive outcome. Let’s explore some key themes that could help settle some nerves.
VIX Index Still Historically Low
While the VIX Volatility Index, often referred to as the “Wall Street fear gauge,” experienced a slight increase over the week, it fell on Friday and continues to stay well under the 20 mark — a threshold commonly viewed by traders as indicative of heightened fear.
Thus, traders are not running headlong for the doors. Traditional safety measures such as reallocation to bonds and gold were not significant. The 10-year Treasury yield ticked back above 4% on Friday but only fractionally.
Meanwhile, gold, which had been experiencing an uptrend alongside equity markets amid a weakening dollar, saw a decline this week.
Also Read: Dry January Investing: Trading Pints For Portfolio Growth
It Could Just Be Profit Taking
After the stellar run that followed the October Federal Reserve meeting — when markets finally got clues the central bank was at the end of its rate hike cycle — the S&P 500 was sitting close to its record high.
The SPDR S&P 500 ETF SPY, the exchange traded fund that most closely matches the index, was up too, having gained 16% between late October and the end of December.
Such was the strength of the rally, investors who would usually engage in end-of-year tax harvesting — explained here — held off to enjoy further market gains.
On Wednesday, Todd Campbell, a writer for TheStreet Smarts, tweeted that last month, investors postponed realizing gains to reduce their tax liabilities. With the arrival of the new month, they have started to lock in some profits, which is resulting in a decline in the markets. Campbell also referenced Helene Meisler, a technical analyst with Real Money, who predicts a continued sell-off in stocks as the market addresses overbought conditions.
The Magnificent Seven Effect
Let’s examine some of the stocks that experienced a pullback this week, particularly those that made significant gains in 2023, including the prominent ‘Magnificent Seven’ tech giants.
- Apple AAPL down 5.5%
- Amazon AMZN down 4.2%
- Tesla TSLA down 4%
- Alphabet GOOGL down 2.7%
- Microsoft MSFT down 2%
- Nvidia NVDA down 0.6%
- Meta Platforms META down 0.5%
The combined market capitalizations of the Mag7 stocks comprise a third of the entire S&P 500’s market weighting. The S&P 500 rallied 25% over the year, but without the Mag7 it would have only been 12%. If the Mag7 were an index in itself, it would have rallied around 75%.
Thus, when the S&P 500 fell 1% on Monday, more than half of the stocks on the index still enjoyed gains. It was just the weighting of the Mag7 losses that took the index lower.
Next week is poised to be another tense period for investors as they anticipate the prevailing sentiment that will set the tone for the markets in January 2023.
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