​​Where to next for the Dow, S&P 500 and Nasdaq 100?

​​​What are the main drivers for Q1 2023?

​Unlike their European counterparts, US equity indices such as the Dow Jones Industrial Average (Dow), S&P 500 and Nasdaq 100 did not manage to shrug off growth worries with the International Monetary Fund (IMF) warning about recession for 1/3rd of the global economies and failed to capitalise on initial gains by ending the first trading day of the year in negative territory.

​Concerns regarding growth, inflation and the US Federal Reserve’s (Fed) hawkish stance remain at the forefront of investors’ minds ahead of Wednesday’s Fed minutes.

​China’s re-opening and move away from last year’s strict zero Covid-19 policy is also viewed by some as a potential concern as a large number of Chinese meeting their families again over the lunar new year celebrations in January could lead to a global surge in cases, new dangerous variants being spread and a slowdown in growth as health services struggle to cope once more.

​A bullish or bearish year for US equities?

​Since its creation in 1923, the US S&P 500 has only had double negative years on four occasions since 1928 but when these outliers in its near 100-year history do occur, second-year declines tend to be deeper than the first.

​Facts and data for the bears

​Some arguments for the bears are that there seems to have been no capitulation in 2022, something which usually occurs at bear market bottoms, that equity allocations remained high in 2022 and cash allocations historically low and that bear markets tend to happen after the US Federal Reserve (Fed) pivots, something which hasn’t been the case yet.

​At the October 2022 low equity allocation remained relatively high at around 60% and cash allocation relatively low at close to 25%. At the majority of previous bear market lows equity allocation was closer to 40% whilst cash allocation rose to around the same percentage level. The exception was the Covid-19 crash with an equity allocation of 55%.

​Historically bear markets occur while or after the US Federal Reserve (Fed) pivots, i.e., when it changes its monetary policy from tightening to easing in the current scenario. This isn't expected to happen until 2024, though.

​With the US 2-year bond yield trading at 4.34%, at higher levels than that of the longer dated US 10-year bond yield at 3.68%, showing an inverted yield curve with investors expecting a decline in long-term interest rates, probable steepening of the yield curve lies ahead.

​Steepening of the yield curve means that the spread between long- and short-term interest rates widens, or, to put it differently, that the yields on long-term bonds are rising faster than yields on short-term bonds, or short-term bond yields are falling as long-term bond yields are rising.

​The problem is that since the 1970s the US yield curve has always steepened as recessions began.

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Facts and data for the bulls

​Equity outflows in December 2022 hit a four-month high while the relative positioning in stocks versus bonds was at its lowest since 2009: pointing to possible mean reversion, with money flowing back into equities, taking place this year.

​Furthermore, several sentiment indicators, which tend to act as contrary indicators, such as CEO business confidence which hit an extreme low in December, seem to point to at least short-term equity gains.

​Add to the above two points the fact that there have only been four double down years in the S&P 500’s near 100-year history, and the bulls may well have a case.

​Technical view on the Dow, S&P 500 and Nasdaq 100

​Dow Jones Industrial Average

​The Dow Jones Industrial Average (Dow) briefly rallied to a three-week intraday high at 33,492 on Tuesday before trading back along the 55-day simple moving average (SMA) at 33,163 ahead of Wednesday’s US Federal Reserve (Fed) minutes which are likely to reaffirm its hawkish view.

​The index so far continues to gradually recover from its 20 December five-week low, made at 32,474, whilst being supported by the December trough and the 200-day simple moving average (SMA) at 32,474 to 32,376.

​While this support zone underpins on a daily chart closing basis, Tuesday’s high at 33,492 may be revisited, together with the mid-November high at 34,010. The latter high would need to be bettered for the early and mid-December highs at 34,661 to 34,941 to be back in play.

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S&P 500

​The S&P 500, although it has so far managed to hold above its October-to-January uptrend line at 3,799, hasn’t been able to overcome the 55-day simple moving average (SMA) at 3,894 and the more important 3,904 to 3,918 resistance area which acted as support between mid-November and early December.

​A rise above the 3,918 late September 2022 high needs to occur on a daily chart closing basis for the index to form a minor bottom and for the 200-day simple moving average (SMA) at 3,987 and the September and December highs at 4,139 to 4,155 to be back on the plate.

​Failure at the 3,764 December low would invalidate the above bullish forecast and instead to the November low at 3,696 being back in the frame and perhaps even the October trough at 3,491.

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Nasdaq 100

​The Nasdaq 100 hasn’t managed to break its descent despite Tuesday’s intraday rally to 11,096 as stocks such as Apple continue to slide - with the company’s shares now trading below their $2tln market cap - while Tesla dropped to near 17-month lows.

​The index remains within its one-month downtrend from its 12,258 December peak, with lower highs and lower lows being visible on the daily chart, and continues to hover above its November-to-December 10,670 to 10,603 lows which represent key support.

​If fallen through, the October trough at 10,433 would be back in the picture.

For a bullish reversal to become a possibility, the index would need to rise above its 21 December high at 11,287 on a daily chart closing basis.