The S&P 500 endured a correction of about 5% down to a key level on the charts. Now rallying, The Daily Breakdown digs in.
Thursday’s TLDR
- Inflation doesn’t spook investors
- Wall Street breathes sigh of relief
- Let’s map out the SPY again
What’s happening?
Well, well, well… Was the worry leading up to Wednesday’s inflation report much ado about nothing?
Despite the fact that stocks actually do quite well during periods of mild inflation — spoiler alert: Friday’s note will dig into the details — Wall Street has worked itself up into a near frenzy about inflation again.
That’s probably because we’re in the throes of a 5% to 10% correction in the S&P 500. While this pullback is “normal” for the market, it doesn’t make it any less emotional for investors who are suffering through the carnage.
Case in point? Market faves like Nvidia and Apple have seen declines in excess of 15% and 10%, respectively, while others like Tesla and Palantir have both retreated by more than 20% and 30%, respectively.
It hasn’t helped that Treasury yields have been marching higher alongside a rising US dollar. And inflation has seen an upward bias over the past few months. So the concerns aren’t completely unwarranted.
But when we’re in a heightened state of emotion, fear can drive our decision making. That allows investors to forget the completely rational part of markets, which is that risk-on assets do well with mild, contained inflation as long as other key catalysts — like earnings growth and the economy — remain favorable.
On Wednesday, Wall Street let out a collective sigh of relief as the CPI report came in slightly below expectations. Are stocks out of the woods? Not technically (more on that below), but a big relief comes now as we enter earnings season.
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The setup — S&P 500
On Dec. 31, we took a closer look at the SPY — one of the most popular S&P 500 ETFs when it comes to trading volume. When we analyzed the charts, we looked at a few potential support zones to keep an eye on (you can review that analysis here).
I like to make these roadmaps ahead of time, not only to help prepare my portfolio for a pullback, but to stay mentally steady during a pullback.
Below you can see how the SPY filled the election gap, down a little more than 5% from its all-time high. Now rallying after the CPI report, traders are keeping a close eye on potential resistance.
In the short term, the $595 level will be on close watch. Not only does recent downtrend resistance come into play near that level, but it’s also where the 50-day moving average is.
Bulls want to see SPY clear these measures in the coming days and a move over $595 does exactly that. If the SPY can close above these measures, more upside follow-through is possible.
On the flip side, bears want to see these measures near $595 hold as resistance. If that’s the case, then the SPY remains vulnerable to more potential downside.
Options
For some investors, options could be one alternative to speculate on SPY. Remember, the risk for options buyers is tied to the premium paid for the option — and losing the premium is the full risk.
Bulls can utilize calls or call spreads to speculate on further upside, while bears can use puts or put spreads to speculate on the gains fizzling out and SPY rolling over.
For those looking to learn more about options, consider visiting the eToro Academy.
What Wall Street is watching
BTC – With a new administration set to take over in Washington DC next week, investors are hopeful that it will lead to a more relaxed regulatory environment for crypto — and possibly soon. While Bitcoin has been consolidating its gains, it continues to hover near the critical $100,000 mark. Check out the charts for Bitcoin.
GS – Shares of Goldman Sachs had an impressive day on Wednesday, gaining 6% and nearly hitting all-time highs. That’s as the company’s Q4 earnings of $11.95 a share came in more than 40% ahead of analysts’ expectations. Investors are optimistic on Goldman Sachs heading into 2025 with the IPO and M&A markets expected to be active this year.
TLT – The TLT ETF, the most popular Treasury ETF by trading volume, posted its best one-day gain since late-November on Wednesday. That’s as Treasury yields finally retreated, part of which is being driven by a “cooler than feared” inflation report on Wednesday.
Disclaimer:
Please note that due to market volatility, some of the prices may have already been reached and scenarios played out.