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The stock market rally is running out of steam, according to Fairlead Strategies’ Katie Stockton.
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But she doesn’t suggest investors sell their stocks just yet, as there could be more upside ahead.
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“We would not pare back exposure because short-term upside momentum remains strong.”
The stock market’s 10% rally since the end of October is starting to run out of steam, but that doesn’t mean investors should sell yet, according to Fairlead Strategies founder Katie Stockton.
She told clients in a Thursday note that the relief rally is showing indications of taking a breather after a few mega-cap tech stocks experienced “outside-down” days during Wednesday’s trading session.
An outside day in technical analysis refers to when a stock sees increased volatility in a trading session, marked by a higher high and a lower low relative to the prior day.
“We expect a few days of healthy consolidation, but we would not pare back exposure because short-term upside momentum remains strong and there are no ‘sell’ signals,” Stockton said. “While the major indices digest their gains, we expect breadth to improve as laggards catch up.”
Breadth, or market participation, has been a long missing ingredient of the 2023 rally, as just a handful of mega-cap tech stocks have driven most of the S&P 500’s gains this year. But that changed on Tuesday after a lighter-than-expected October CPI report sent stocks soaring.
Since then, market participation has improved considerably, with a rally in smaller-cap, value stocks, and stocks across all sectors materializing.
Stockton still sees gains ahead for tech stocks even though they’ve been responsible for much of this year’s surge. She highlighted that the Nasdaq Composite is testing its July high of around 13,932 as resistance. A decisive breakout above that level would bode well for the broader stock market.
“A brief pause at this level would be natural, noting the index’s second largest component Microsoft shows signs of short-term upside exhaustion. Should the Nasdaq confirm a breakout, it would be a bullish long-term development, noting our monthly indicators would improve in kind,” Stockton said.
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