Image Source: PexelsThe stock market started the first week of the year down, with the decline in the S&P 500 being driven by a big drop in shares of Apple, as that stock makes up a large part of the index. The same is true for the Nasdaq, of course.The headlines in the financial media mostly focused on changes in perceptions on how quickly and how much the Federal Reserve will lower interest rates this year, as well as Friday’s employment data, linking every tidbit of news with the short-term gyrations in the market. In reality, this news didn’t have much to do with what the stock market did last week, and it is simply a bunch of noise.You see, before last week, many people were predicting that the Federal Reserve would lower interest rates in March. By the end of the week, the Fed funds future market priced in a 65% chance of a cut, reducing the odds. That supposedly created a lot of angst among traders and investors, but those same Fed fund futures are pricing in a 92.3% chance of one by the May meeting.What difference does it make if the Federal Reserve lowers rates in March or May? I would say none when inflation is still above 3%, and interest rates shouldn’t even be reduced anyway without the CPI inflation rate close to 2% or economic data that says that the economy is in a recession.Interest rates are not high. Go look at the average interest rate in the past 100 years, and they are just around the average.Lowering rates until inflation goes away is reckless, and for Federal Reserve officials to suggest doing so only moves away from their mandate of sound money while trying to make stock market investors happy ahead of the November elections.Either way, the Federal Reserve has seemingly ended its campaign to fight inflation for a new round of easy money policies, which will come with the cost of an even bigger wave of inflation down the road.So, why did the stock market fall last week? The reason is simple. The market went up so fast in November and December that it became overbought, and some people decided to take profits once the calendar flipped to January.In, fact the market got so overbought coming into the new year that the RSI, a technical analysis indicator that measures overbought and oversold conditions for a market, came into this year over 80 – it’s highest reading in almost six years.
Just because the stock market is overbought, though, doesn’t mean it is going to crash or go into a new bear market right now. Most of the time, overbought conditions are worked off by sideways action, and that is most likely what is really happening in the markets now.You can see the RSI indicator on the chart above. You can also see the stochastics indicator, another popular technical indicator, which gives oversold and overbought readings. It signals overbought conditions when both stochastics are over 80, and it signals oversold conditions when they are under 20. They are on the path to going below 80 in another week.As I wrote in my financial markets forecast for 2024, this is simply year two of a short-term cyclical bull market for the US stock market. However, as this is a new year and a more mature cyclical bull market, especially with the Federal Reserve no longer raising interest rates, leadership is shifting into sectors beyond big-cap tech stocks this year.Stocks that pay stable dividends are likely to outperform most of the big-cap tech stocks in 2024. Two that I own are Dominion Energy (D) and Piedmont Office Realty Trust (PDM).
Dominion Energy is a utility stock that has been paying a 5.44% dividend. I actually bought it in November near its lows when it was paying a dividend well over 6%. The stock recently has seen support at $46, and it closed on Friday above its 200-day moving average. Everything looks good to me with this stock.Utility companies have stable earnings, and people often buy them for their yields. That makes them attractive when interest rates go down, but at the same time the utility stock sectors tends to do poorly when interest rates rise, which is exactly what it did last year until November.The same is the case with the REIT stocks, and one such REIT I own is Piedmont Office Realty.
Piedmont Office Realty has been paying a dividend over 7%. It had a rally that stalled out around $7.50 back in July, and the same price area became one of resistance in December.So, it appears to be consolidating this month, like much of the stock market, below its December resistance high point. I’m looking to see if it will breakout through resistance before this month is over.More By This Author:Financial Markets Forecast For 2024 The Stock Sectors Now Leading This Rally (Implications For Business Cycle)Silver Looks Ready To Shine As The US Dollar Index Rolls Over
