Stock indexes rebound after 100-hour moving averages hold

The S&P 500, NASDAQ composite and NASDAQ 100 all reached new closing highs earlier in the week. Those gains reversed on Wednesday and Thursday, with each index finishing lower. The decline brought them to their rising 100-hour moving averages, where buyers stepped in to provide support. Despite the downbeat close yesterday, some follow-through buying has appeared today.

On the positive side:

• The 100-hour moving averages provided support, as buyers emerged at those levels. Holding above those averages could give stocks a base for additional gains.
• The declines were not broad. The Dow Jones Industrial Average and Russell 2000 posted small gains, while the S&P 500 and Nasdaq fell. This indicates a rotation out of technology rather than a broad sell-off.
• Earnings continue to underpin the market. Robust profit growth and artificial intelligence spending have kept major indexes near their peaks. The question is whether earnings expectations can be maintained.
• Falling oil prices would be beneficial. A prolonged decline would reduce inflation pressure, business costs, and consumer burdens. The recent retreat in oil has offered some respite, but geopolitical risks in the Middle East persist.

However, there are also several concerns for equities:

• Questions surround AI expectations. The technology sector's decline on Thursday came after reports that OpenAI's revenue missed investor forecasts. This casts doubt on how soon huge AI investments will generate profits.
• The market's concentration is a risk. The ten biggest stocks make up about 40% of the S&P 500. A drop in those leaders could significantly drag the index down.
• Elevated Treasury yields are a headwind. They increase borrowing costs and make fixed-income investments more attractive relative to equities. Growth stocks are especially vulnerable as their valuations rely heavily on projected earnings.
• The previous breakout attempts need to be repaired. While holding the 100-hour moving averages is positive, buyers must still recapture the former record-high swing levels that were identified. Without that, the current move may only be a corrective bounce.
• Oil prices and geopolitical news can shift sentiment rapidly. Another surge in energy costs would reignite inflation worries and cloud the interest-rate outlook.

The University of Michigan’s preliminary October survey introduced another worry for equities. Consumer sentiment dropped to 46.3, below the expected 47.6 and down from 48.1 previously, driven by a steep fall in current conditions to 44.7 from 50.9. On the positive side, consumer expectations rose to 47.3 from 46.3, topping the 45.9 forecast. However, one-year inflation expectations edged up to 4.7% from 4.6%, and five-year expectations climbed to 3.5% from 3.4%. For stock markets, weaker sentiment alongside rising inflation expectations is an unwelcome combination: consumers feel immediate pressure, while persistent inflation may keep borrowing costs high.

From a technical standpoint, actual price movements will decide the outcome between these bullish and bearish factors. Since the 100-hour moving average provided support in each index yesterday, that level becomes more significant today and beyond. For traders seeking a technical sell signal, that moving average can serve as a barometer: above it is bullish, below it is bearish.