Santa Rally in Doubt as Dow Plunges and Market Breadth Weakens

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Dow Jones,Santa Rally,Federal Reserve

Concerns are mounting for stock market bulls as the Dow Jones Industrial Average experiences a historic losing streak and market breadth remains weak. The Federal Reserve's hawkish stance and potential stagflation in 2024 are adding to the uncertainty. Despite a rebound in index futures after the Federal Open Market Committee meeting, the outlook for a traditional 'Santa rally' is uncertain.

The Dow’s historic losing streak and weak market breadth are concerning for the bulls. Is a Santa rally still in play after yesterday’s big drop? The FOMC’s outlook for 2025 shifted sharply in the hawkish direction, with the FOMC signaling just 2 rate cuts for the year ahead worth a total of 50 basis points.

Stagflation could be the key theme moving into the new year, which Trump will be hoping to address with record deficit spending, while the stock market bulls will be hoping that the AI hype will continue to outweigh those concerns. Anyway, for now, risk appetite has improved a little. Following the big post-FOMC drop, index futures staged a rebound overnight, while in the Asia Pacific, the Bitcoin fell below $100K, but it has since bounced back along with other risk assets to keep it above this psychologically important level for now. Therefore, sentiment has improved a little after yesterday’s selling. But with the major risk events now behind us, the key question is whether the usual Santa rally will now resume or whether this time things might turn out to be different. One thing that is becoming clear is that the bullish momentum is fading. And not just for the S&P. In fact, the bearish momentum is gathering pace for value stocks. The Dow, from its highest point since the selling started, is now down some 2900 points at its lowest, all in just 2 weeks. In addition to the Dow’s losing run, something unprecedented is unfolding in the S&P 500: in nearly a century of history, the US benchmark index has been near a record high this week until Wednesday’s drop, yet fewer than 39% of its stocks were trading above their 50-day moving averages. Only just over 30% of S&P 500 stocks have outperformed the index year-to-date, marking the second consecutive year of such a low percentage after 2023's 29%. This has only happened once before, in 1998-1999, just before the Dot-com bubble burst. A few stocks are driving the entire market

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