How to Determine if This Market Recovery is Genuine, Based on Chart Analysis

How to know if this market comeback is for real, according to the charts

Understanding Market Dynamics: December’s Challenges and January’s Opportunities

As we look back at recent market behavior, it’s crucial for investors to unpack the nuances behind the trends. December 2023 was marked by a notable phenomenon: sub-par market internals. This led to a rather troubling statistic—more S&P 500 stocks declined than advanced during the first 14 trading days. An extended bearish streak like this, especially in a month that typically sees year-end bullishness, raises serious questions about market health.

Despite the declining breadth of stocks, major growth names continued to surge, creating a divergence within the market. This situation highlights a crucial aspect of market-cap-weighted indices like the S&P 500: while popular and influential stocks prop up the index, the average performance of S&P 500 constituents paints a much bleaker picture.

The S&P 500 Equal Weight ETF (RSP): A Case Study

Further exploration of this scenario reveals insights through the Invesco S&P 500 Equal Weight ETF (RSP). December was a particularly challenging month for RSP, which recorded a 6.6% decline—the worst since September 2022. To put this into perspective, RSP only had two months in all of 2022 where it faced steeper losses. However, history shows us resilience: RSP has rebounded six out of seven times in the month following a decline of over 6.5%. Remarkably, the only exception was in February 2020, coinciding with the onset of the COVID-19 pandemic.

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As we transition into January 2024, early signs indicate a possible recovery, with RSP up 1.3% compared to the S&P 500’s 0.6%. What’s particularly encouraging is RSP’s powerful reversal observed early in January—a 180-degree turn from potential decline to robust advancement. While such a reversal alone doesn’t guarantee the start of a new bullish trend, it suggests possibility, especially after a period of bearish activity.

Key Elements to Watch

Several critical factors will determine whether this bounce translates into a sustained upswing:

  1. Support Levels: RSP’s recent rebound occurred just above its 200-day moving average, a vital support line that can dictate the momentum of future trades.

  2. Momentum Divergence: Positive momentum divergence is currently at play. The 14-Day Relative Strength Index (RSI) is holding higher lows while RSP hit a new low—a classic signal of potential reversal brewing beneath the surface.

  3. Formation of Higher Lows: Moving forward, RSP must establish a higher low after this initial bounce. If it fails and creates a lower low, we could see a continuation of the bearish trend rather than the formation of a bullish pattern.
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Sector Rotation: A Beacon of Hope

A key takeaway from the current market behavior is the imperative of sector rotation. The market has showcased its resilience—advancing even amidst fluctuating leadership among sectors. As we kick off January 2024, we’re starting to witness the development of a much-needed rotation, which did not occur in such a timely manner over the past two years.

Sector rotation can be an investor’s lifeline, and it acts as a catalyst for broader market strength. With early signs of renewed interest in non-tech sectors, it presents a unique opportunity for investors willing to navigate these shifts thoughtfully.

The Road Ahead

As we continue through January, it will be essential for investors to monitor these indicators: the establishment of higher lows, sustained interest from non-tech sectors, and continued divergence in momentum. The path may be fraught with volatility, but as history has shown, significant market movements often follow periods of upheaval.

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At Extreme Investor Network, we believe in providing our community with not just data but crucial context and analysis that empowers your investment decisions. As always, before making any financial commitments, consulting with a seasoned financial advisor remains paramount to navigate these complex waters effectively.

Stay tuned for more insights and updates as we continue to track market trends, strategies, and the evolving landscape of investment opportunities.