"Running Ahead" The Federal Reserve cuts interest rates! Bulls position in the S&P 500, but risks are quietly brewing

According to Zhitong Finance APP, despite increasing concerns over the past week that narrowing market breadth could suppress the strong rally of the S&P 500 index, it has proven that bulls are still buying stocks ahead of the Federal Reserve's interest rate decision.

Data compiled by Bloomberg shows that since the U.S. election day, the DVAN trend line of the index (a proprietary divergence analysis measuring buying or selling pressure) has remained in a buy state, with investors continuing to buy stocks on multiple trading days over the past week. Although the rally has stalled in recent days, there has not been significant weakness in price and breadth trends, with the S&P 500 index currently less than 1% away from its record high after setting 57 historical highs in 2024.

Andrew Thrasher, a technical analyst and portfolio manager at Financial Enhancement Group, stated, "We do not see signs of expanding downside breadth, so there is no reason to turn bearish. A mere lack of upside breadth is not enough to shift to a bearish market; more bearish data is needed to confirm this—and we do not have such data at the moment."

The DVAN trend line shows that bulls are still buying stocks.

This has left some confused, as the S&P 500 index has seen more declining stocks than advancing stocks for 12 consecutive trading days—Bloomberg data indicates this is the longest duration since 1996.

While this has raised concerns that the U.S. stock market rally may stall before the end of the year, with a decreasing number of advancing stocks, Deutsche Bank macro strategist Jim Reid stated on Tuesday, "The only conclusion we can draw at the moment is that the market is quietly but steadily shifting towards the seven giants." The so-called seven giants include NVIDIA (NVDA.US), Apple (AAPL.US), Amazon (AMZN.US), Meta (META.US), Alphabet (GOOGL.US), Tesla (TSLA.US), and Microsoft (MSFT.US).

The S&P 500 index has seen more declining stocks than advancing stocks for 12 consecutive trading days.

Growth sectors such as consumer discretionary, communication services, and technology are leading the market again, with most of the seven giants in these sectors, while the breadth of energy, materials, and healthcare stocks is deteriorating, all falling below their respective 200-day moving averages Of course, the S&P 500 has seen significant gains in four out of the past six weeks, rising nearly 5% since the U.S. election day. However, at the same time, according to data compiled by Bloomberg, the index has not fluctuated more than 1% in the past 21 trading days, indicating that everything is calm beneath the surface.

Investors are returning to growth stocks!

Analysis by Stephen Suttmeier, a technical strategist at Bank of America, shows that although the S&P 500's trend lines have not confirmed new highs for December, the strong breadth of the most traded U.S. stocks indicates that a significant amount of capital is still being invested—this is a bullish signal.

However, it is concerning that currently, less than half of large-cap stocks are trading above their 50-day moving average, and the number of stocks reaching new highs has been decreasing in recent weeks, contrary to the overall market trend. This is often the first step of a potential bearish sign—a lack of strength.

But Thrasher explained that to see a widening breadth of declines, there must be an increasing number of signs of weakness following, which means individual stock prices will fall. Traders have not yet seen an increase in the number of declining stocks.

The Federal Reserve will announce its interest rate decision and economic projections summary at 03:00 Beijing time on December 19 (Thursday), followed by a monetary policy press conference by Fed Chairman Jerome Powell.

The market widely expects the Federal Reserve to cut rates for the third consecutive time, with officials indicating that the pace of rate cuts will slow in the coming months.

Willie Delwiche, founder and strategist at Hi Mount Research, is watching whether the upward momentum will continue, as the equal-weighted S&P 500 has underperformed the market-cap-weighted S&P 500 for the third consecutive week, marking the longest stretch since February.

Delwiche stated, "This indicates that investors are returning to the seven giants, and it is also evidence of deteriorating conditions beneath the surface."