Stocks Hit New Highs as Fed Rate Cut Fuels Broad Market Rally

Technical Stock Market Briefing for Day & Swing Traders
| By Harry Boxer, Technical Market Analyst

Stocks hit new record highs again last week, riding the wave of optimism from the Fed’s recent rate cut, ongoing AI enthusiasm, and signs of broadening leadership underneath the surface of the bull market.

U.S. stocks rose for the third week in a row, extending their recovery from a sharp weekly decline in the first week of September. The S&P 500 and the Dow added 0.6% to the record-high levels they reached the previous week; the NASDAQ rose 1.0% and ended up 2.8% below a record it set more than two months ago.

Technically, the Russell 2000® (RUT) small-cap index appeared to be breaking out of a bull flag formation. “If the RUT is able to clear its prior 52-week high from back in July, this could shift the ‘rotation trade’ into a higher gear and would likely be viewed as a bullish confirmation.”

Market breadth stayed healthy ahead of the weekend with 79% of S&P 500 stocks trading above their respective 200-day averages and 82% above their 50-day moving averages. Wide breadth can indicate a healthy market where investors aren’t piling most of their money into just a few heavily capitalized mega caps. However, sentiment has grown frothy, which can sometimes indicate rougher sailing ahead.

Chinese stocks surged sharply last week as the nation’s central bank approved measures to accelerate recently sluggish growth for the world’s second-largest economy. The People’s Bank of China on Tuesday announced plans to lower borrowing costs, inject more funds into the economy, and ease households’ mortgage repayment burdens.

The price of U.S. crude oil dropped nearly 4% for the week to less than $69 per barrel on Friday. That price is down from a recent high of nearly $84 per barrel in early July and is little changed year-to-date.

Markets have not yet seen any meaningful reactions from election uncertainties. However, they may yet emerge as November approaches, and a focus on policy proposals (and differences) intensifies. Volatility typically rises ahead of election day but often subsides quickly, as investors turn their attention back to the prevailing economic and market trends.

Markets have performed well leading up to this year’s presidential election. Stocks were higher again last week, notching the sixth weekly gain in the last seven, with an impressive gain of 11% since early August.

Historically, market volatility has risen leading up to elections and subsided after. Since World War II, volatility has decreased by an average of 16% in the month following presidential elections. Most recently, the VIX index (a measure of stock market volatility) declined 36% in the 10 days following the 2020 Trump-Biden election.

Over the past 80 years, in the month leading up to presidential elections, the stock market was positive for that month in slightly more than half the years.

However, from the election through year-end, the market was positive during that period in all but three years. It’s worth pointing out that the largest post-election (through year-end) gains occurred in (in descending order): ’20, ’52, ’60, ’04, ’80, ’72, ’16, ’96, ’76, and ’92. This reflects the fact that markets have taken direction more consistently from broader fundamental conditions than from political parties.

The stock market dropped an average of -1% in the week following the election. The worst 1-week performance followed the 1948 (-6%) and 2008 (-15%) elections; the best followed election day in 2020 (5%), 2004 (3%), and 1996 (2%). More than 60% of the time, the stock market was down in the week following the election.

The stock market increased by an average of less than 1% in the month following the election.

The worst 1-month performance followed the 1984 (-4%) and 2008 (-16%) elections; the best followed election day in 2020 (9%), 2004 (6%), and 2016 (5%). The tables are flipped versus the 1-week figures, with the market positive more than 60% of the time in the following month.