Market Analysis - Short Term Outlook
As we approach the end of December 2025, the market has shown signs of recovery, particularly in the latter part of the week, driven by positive inflation data and strong earnings from key companies. However, the outlook remains mixed, and investors should be cautious as we head into a holiday-shortened trading week.
The Week That Was
Last week, the forecast was "Moderately Bullish," anticipating a continuation of the bullish momentum seen in major indices. However, the reality has been a flat to slightly down performance across the board, primarily due to:
- Initial selling pressure in tech stocks due to ongoing concerns regarding AI.
- A late-week recovery fueled by a strong earnings report from Micron Technology.
- Cooler-than-expected CPI data, which has provided some relief to investors.
Despite this recovery, a contrarian sell signal from Bank of America indicates that bullish sentiment may be overstretched, suggesting potential challenges ahead.
Key Indicators
- SPXEW (S&P 500 Equal Weight Index) has shown a recovery, closing above previous resistance levels.
- Russell 2000 Index remains cautious, struggling to reclaim its breakout level.
- Market breadth has contracted, indicating a potential weakening in overall market strength.
Outlook for Next Week
Next week is expected to be holiday-shortened with light trading volume, which could lead to increased volatility. The forecast is "Slightly Bullish," but the following factors could challenge this outlook:
- Rising U.S. Treasury yields, which have shown a tendency to impact market sentiment negatively.
- Mixed economic signals, including soft jobs data and a skeptical view on retail sales.
Key economic reports to watch include:
- Capacity Utilization and Durable Orders on December 23.
- Initial Claims and EIA Crude Oil Inventories on December 24.
Technical Take
The technical picture remains mixed:
- The SPXEW's recovery is encouraging, but the Russell 2000's failure to reclaim its breakout level raises concerns.
- Overall, the intermediate and long-term trends remain bullish, but near-term price action is uncertain.
Conclusion
In summary, while there are signs of recovery and potential for a year-end rally, investors should remain cautious due to mixed signals and the possibility of increased volatility. Monitoring economic data and market sentiment will be crucial in navigating the upcoming trading week.