Home Investing Should you buy or sell the S&P 500 index after failing to hold above 4,000 points?

Should you buy or sell the S&P 500 index after failing to hold above 4,000 points?

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2022 turned out to be the year of central banks tightening their monetary policy. Even the last major central bank that did refuse to tighten gave up today, as I wrote here.

When central banks embark on a tightening cycle, risk assets are hurt. After all, why would anyone invest in the stock market for an uncertain return when they could buy a risk-free asset such as the US-10 year and lock in a great (and certain) return?

We should not, therefore, be surprised that US stocks delivered negative returns for the year with just a few trading days left. However, looking ahead, the outlook for US stocks is not that grim.

Fed’s aggressive tightening cycle hurt stocks in 2022

The Federal Reserve of the United States is the most influential central bank in the world. After all, it reigns over the US dollar – the world’s reserve currency.

Tightening this year was abnormal. This is one of the most aggressive tightening cycles ever, meaning that stocks had a hard time exiting the bearish trend.

However, inflation is coming down in the United States. As such, the Fed is at risk of tightening too much.

Judging by the last inflation reports, the aggressive tightening cycle is near its end. If that is the case, then 2023 might be a great year for stocks.

S&P 500 failed at dynamic resistance – again

From a technical perspective, the S&P 500 was in a perfect bearish trend in 2022. A bearish trend has a series of lower lows and lower highs.

Until the series is broken, the bear market is still ongoing.

S&P 500 chart by TradingView

The chart above shows the 2022 price action, and the series of lower highs is not broken. Effectively, it means that the rally from the October lows is, for now, just a bear market rally.

It appears that the S&P 500 must hold above 4,000 for a while before attacking the lower high in the 4,300 area. Such a move will break the dynamic resistance that acted as a technical barrier for bulls throughout the trading year.

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