Earlier this week, the broader S&P, NASDAQ composite, and NASDAQ 100 indices all traded and closed at new record levels. However on Wednesday and Thursday, the price rotated to the downside closing lower on each of those days. Technically the move lower took the indices each to their rising 100 hour moving averages, and each found support buyers near those levels. Although closing lower yesterday, we are seeing some modest follow-through buying today.
Positives for stocks include:
- The 100-hour MAs held yesterday. Using the support you highlighted, buyers showed up where they needed to. Stay above those moving averages and they have a foundation for a further recovery.
- The selling was not across the board. The Dow and Russell 2000 edged higher yesterday while the S&P and Nasdaq fell. That suggests some rotation away from technology rather than investors abandoning all stocks.
- Earnings remain a support. Strong corporate profit growth and AI investment have helped keep the broader market near record highs. The concern is whether those earnings can continue meeting expectations.
- Lower oil would help. A sustained retreat would ease pressure on inflation, business costs and consumers. Oil’s reversal has provided some relief, although the Middle East backdrop remains uncertain.
Concerns for stocks are also lining up
- AI expectations are being questioned. Yesterday’s technology selling followed reports that OpenAI revenue disappointed investor expectations. That raises questions about how quickly massive AI spending translates into profits.
- The market depends heavily on a few companies. The ten largest companies account for roughly 40% of the S&P 500. Weakness in those leaders can weigh heavily on the index.
- High Treasury yields remain a headwind. They raise financing costs and make bonds more competitive with stocks. Growth stocks are particularly sensitive because much of their valuation depends on future earnings.
- The failed breakouts need repairing. Holding the 100-hour MAs is encouraging, but buyers still need to reclaim the old record-high swing areas you identified. Otherwise, this could remain a corrective bounce.
- Oil and geopolitical headlines can change the mood quickly. Another energy spike would renew inflation concerns and complicate the interest-rate outlook.
The just-released University of Michigan preliminary October survey adds another concern for stocks. Consumer sentiment fell to 46.3 versus 47.6 expected and 48.1 previously, led by a sharp decline in current conditions to 44.7 from 50.9. The positive was that consumer expectations improved to 47.3 from 46.3, beating the 45.9 forecast. However, one-year inflation expectations rose to 4.7% from 4.6%, while five-year expectations increased to 3.5% from 3.4%. For stocks, weaker sentiment combined with rising inflation expectations is an uncomfortable mix: consumers feel pressure today, while persistent inflation could keep interest rates elevated.
Technically however, the price action will help tell the story of who wins this battle of positives and negatives. With the 100 hour moving average holding support in each of the indices yesterday, that should increase the levels of importance today and going forward. Traders looking for reasons to sell from a technical perspective could use that moving average as their barometer for bullish above, bearish below.
In the video above, I talked to the technicals driving each and show the reasons for the importance in more detail.
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This article was written by Greg Michalowski at investinglive.com.