SPX Spotlight - Friday, Dec 20, 2024: Market Ends Volatile Week on High Note.

Market finds its buyers at key levels after tumultuous week.

Introduction

This rally came as a welcome relief after a tumultuous week that saw the index suffer its biggest one-day drop since August on Wednesday. Despite Friday's gains, the S&P 500 still posted a 2% loss for the week, reflecting the market's recent volatility and highlighting the ongoing tension between economic data and Federal Reserve policy expectations.

As we approach the final trading days of 2024, the S&P 500 remains up more than 24% year-to-date, showcasing the market's resilience in the face of economic uncertainties and policy shifts. However, with eight of the eleven S&P 500 sectors in negative territory for December, investors are closely watching for signs of a potential "Santa Claus Rally" to close out the year on a high note

Market Drivers and Economic Reports

The S&P 500 staged an impressive recovery on Friday, December 20, 2024, closing 1.1% higher at 5,930.85. While this late-week rally helped offset earlier losses, the index still ended the week down 2%. Similarly, the Dow Jones Industrial Average climbed 498.02 points, or 1.2%, to 42,840.26, and the Nasdaq composite rose 1% to finish at 19,572.60.

All eleven sectors of the S&P 500 closed in positive territory, led by Real Estate and Information Technology, which posted gains of 1.82% and 1.53%, respectively. This widespread rally reflected a boost in investor confidence following the release of encouraging economic data.

However, despite Friday’s uptick, eight of the eleven sectors remain in negative territory for December. This highlights the market’s ongoing volatility, driven largely by fluctuating expectations around the Federal Reserve’s monetary policy.

Friday’s market surge was fueled by the release of the Personal Consumption Expenditures (PCE) Price Index, a key inflation metric closely watched by the Federal Reserve. The Commerce Department reported that November's PCE increased 2.4% year-over-year, coming in below market expectations.

The softer-than-expected inflation reading reassured investors concerned about persistent price pressures. It also signaled that inflation may be moderating, potentially allowing the Federal Reserve greater flexibility in its monetary policy decisions.

Earlier in the week, the Federal Reserve had taken a cautious approach, signaling fewer interest rate cuts for 2025 than previously anticipated. The PCE report alleviated some of the anxiety caused by this tempered outlook, offering hope for a more accommodative stance moving forward.

Chicago Federal Reserve President Austan Goolsbee struck an optimistic note on Friday, suggesting the latest inflation data could open the door to rate cuts in 2024 despite the central bank’s careful messaging. His comments, coupled with the PCE report, contributed to the day’s relief rally.

As investors adjust their expectations for the Federal Reserve’s policy and broader economic trends heading into 2025, inflation data and other key indicators will remain critical in shaping market direction. While Friday’s rally ended the week on a high note, market volatility and economic uncertainty continue to loom large.

Technical Analysis

Recap

SPX 4 Hour chart

We traded in the channel on Thursday and Friday as discussed in the previous article.

Bull/Bear Case

SPX 1 Hour chart

We multiple EMAs aligning with key resistance level, we may see the market hit 5,997.84 level and consolidate to pivotal level at 5,915.

A key support level at 6,033 that broke from FEDs report can act as a resistance. If we cross the first resistance, we may hit by a second one. These levels may act as liquidity zone for a push higher and continuation of a downward trend.

Market Sentiment and Key Indicators

VIX 1 Hour chart

On hourly chart VIX has room to give up on the EMA its resting on and test 200 EMA at 16.60 level. A pullback if happens aligns perfectly on 50 EMA on a 4 Hour chart.

VIX 4 Hour chart

In a bear case scenario, the doji candle on the chart can indicate VIX going higher, adding more volatility to the market and potentially markets heading down.

Key Takeaways & What’s Next

As the S&P 500 moves forward, several critical factors are likely to influence its trajectory:

1. Federal Reserve Policy
   Investors will closely watch for signals from the Federal Reserve about future interest rate moves. The market's reaction to recent Personal Consumption Expenditures (PCE) data underscores heightened sensitivity to inflation metrics.

2. Technical Indicators
   The S&P 500's ability to stay above the 5,900 level is vital for sustaining bullish momentum. A decisive break above this resistance could pave the way for a move toward the psychologically significant 6,000 mark.

3. Corporate Earnings Outlook
   Analysts project robust corporate earnings growth, with estimates of 12% for Q4 2024 and 15% for 2025. This optimistic forecast could bolster market valuations and underpin further gains.

4. Seasonal Trends
   December traditionally tends to be a strong month for the S&P 500, particularly in years with significant year-to-date growth. The potential for a "Santa Claus rally" may provide additional tailwinds for the index.

5. Geopolitical and Economic Risks
   Despite overall positive sentiment, potential headwinds remain. Investors should keep an eye on global geopolitical tensions and the possibility of persistent inflation, both of which could impact market dynamics.

6. 2025 Election-Year Volatility
   As the U.S. heads into an election year, historical trends suggest increased market volatility, especially in the latter half of 2025. This could create both challenges and opportunities for investors looking to navigate the shifting landscape.

Closing Thoughts

Amix of optimism and caution will likely shape the trading session as market participants assess the balance of risks and opportunities

What’s your take on market tomorrow? Comment below.