SPY Technical Analysis & Weekly Stock Market Update

SPY Technical Analysis & Weekly Stock Market Update

Markets roared higher last week, extending their already impressive November rally into the first week of December. The spotlight was around small cap stocks as capital rotated out of select large cap names and into stocks within the Russell 2000 index (IWM), which has lagged behind the S&P 500 and The Dow in 2023. Traders and investors are always quick to buy large cap and fundamentally strong companies during market rebounds, but eventually, as these companies reach overbought levels, savvy traders turn to different areas of the market where capital hasn’t flowed yet. We’re expecting this kind of capital rotation to continue through the end of 2023 and into 2024, many stocks have yet to gain the traction, but as the fear and greed index moves further into greed, the higher risk companies will start to gain alongside the market. 

Unlike many rally attempts in 2023, November’s rally has a solid foundation to it. The biggest and most notable would be the decline in inflation, which will eventually lead to rate cuts. Interest rates are the biggest weapon The Fed has against rising prices, but they’re also the kryptonite to the stock market. Cooling inflation on last month’s report gave markets hope that rate cuts are around the corner and helped boost stocks for that reason. Although interest rates are still unchanged, the stock market is a forward-looking machine and will begin pricing in future Fed decisions far ahead of their occurrence. Q3 earnings and GDP also helped solidify the market rally as many companies beat expectations and the U.S. economy grew at a higher rate than previously projected, all while unemployment remained strong. The recession narrative has slowly lost its footing and markets are realizing that fears may have been overblown. 

Quick comment on interest rates and high risk companies:

Any company that is young, or in a growth phase, will need to borrow a substantial amount of capital in order to finance its operations, spend on research and development, and hire more employees. All these things require cash, and these companies tend to suffer during high interest rate environments. As signs of interest rate cuts begin to fill the market, these companies will start pushing higher. We see this especially in companies within the tech and clean energy sector. 

Technical analysis:

Although SPY didn’t move much last week because capital flowed into The Dow and IWM, it still maintained a level near its recent highs. After consolidating all week, it finally gained momentum on Friday and moved closer to its 460.00 resistance, so probabilities are high that it will test 462.00 resistance this week, a breakout above that has a price target of 464.00-465.00. Use the chart above for both bullish and bearish levels.