Profit Taking or Buying Opportunity?

With the US stock market approaching a rare six-month winning streak, investors find themselves at a crossroads. Should they cash in on their gains or double down on their bets? Compiled data shows the S&P 500 has traded above its 50-day moving average for 125 consecutive trading days, the longest stretch since 2011. In the past 30 years, the benchmark has only exceeded this streak three times. While rallies rarely end simply because they’ve lasted too long, the index's significant gains since early April, adding $17 trillion to its market capitalization, make valuations look stretched and market positioning high. However, bulls are bolstered by historical data, as November traditionally kicks off the best six-month period for US equities. The question is, after one of the best six-month stretches since the 1950s, are these year-end gains already priced in? Dan Wantrobski, technical strategist and associate director of research at Janney Montgomery Scott, sees the S&P 500 facing as much as a 10% downside risk before the end of December. “We are in the danger zone again for a sell-off. At this point, any dip wouldn’t be too serious. But if there isn’t a pullback in the near term, it will likely set up a more severe correction in the first half of next year as traders eventually look to take the froth off the top,” he says. For Wantrobski and other technical analysts who monitor daily averages and other gauges to gauge stock-market momentum, the S&P 500’s continued trading above its support lines sends a steady and powerful signal. In 2011, during a major debt-ceiling fight, the S&P 500 remained above its 50-day moving average for 130 consecutive trading days. If the current 125-day rally lasts until next Wednesday, it will become the second-longest this century, trailing only the 149-day record set in February 2007. Prior to that, from January 1995 to January 1996, as the dot-com bubble began, the index notched a 257-day winning streak – its longest ever, according to data going back to 1928. Of course, the next few days are crucial for the stock market as major tech companies will announce their quarterly earnings and the Federal Reserve will make an interest rate decision. The Fed's post-meeting statement is scheduled for 2 AM Beijing time on Thursday, and investors will carefully study Chairman Powell's speech half an hour later for clues about the direction of the Fed's policy in the coming months. As earnings season deepens, investors are also watching company executives’ forecasts for the last few months of the year. This week is the busiest week of earnings season, with over 40% of the S&P 500 companies reporting, including Microsoft (MSFT), Alphabet (GOOGL), and Meta (META) after the close on Wednesday, and Apple (AAPL) and Amazon (AMZN) on Thursday. In another key technical indicator for the US stock market – the 200-day moving average is approaching historical extremes, appearing overstretched – concerns about the valuations of major tech companies are increasing. The index is currently 13% above its long-term support level of 6097 points. Data shows that historically, such a large gap has signaled sell-offs, as occurred in 2011, 2018, and 2021. In July 2024, the benchmark was as much as 15% above that average, then the closing of yen carry trades roiled financial markets, triggering a brief summer slump. However, Rich Ross, head of technical analysis at Evercore ISI, believes that the alarm bells haven't fully sounded yet. He says that the S&P 500 has typically traded more than 10% above its 200-day moving average in recent years. This gap is usually accompanied by a period of consolidation and eventually drives stocks to new highs. Ross is also optimistic about seasonal patterns. According to compiled data, the S&P 500 has averaged gains of about 2.5% in November over the past thirty years, the strongest month on average, while the other 11 months have averaged gains of 0.6%. “The good news for equity bulls is that even with the S&P 500 making record highs, sentiment and positioning are still somewhat bearish – owing to lingering trade-war concerns and fears of a potential credit crunch,” Ross said. His year-end target for the S&P 500 is 7400, implying a 7.4% upside from Tuesday's close. “There are reasons to be bullish and bearish, but right now, it’s hard to fight this rally.”