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The S&P 500 (SPY) had a nice move higher in 2023, gaining about 25%. However, the market doesn’t increase without corrections along the way. Even 2023 had two 10% corrections between February and March and again between July and October before the end of year rally higher. The market is dropping from an overbought condition and showing a bearish divergence, which makes it likely that we will experience a decline in Q1 2024.Technical Outlook – Bearish DivergenceSPDR S&P 500 (SPY) Daily Chart with RSI (Tradingview)The daily chart above shows a bearish divergence between the increasing price of the S&P 500 in December and a decline in the Relative Strength Index [RSI] indicator during the same time period. There was a similar set-up between July and August which resulted in a multiple-month decline of about 10%. That was a text book market correction.The RSI indicator recently dropped from an overbought condition. This indicates that the momentum in the rally has waned. It is likely that a market sell-off will ensue.Given this bearish set-up, the S&P 500 and the other broad indexes such as the Nasdaq (QQQ) and Dow Jones Industrial Average (DIA) are likely to experience a decline in Q1 2024. The charts for QQQ and DIA look similar to SPY.The mechanics behind what is likely to happen is that the market’s recent increase is probably not sustainable without a pullback or correction. Large investors could lock in profits from the recent rally and begin trimming their holdings. This can put negative pressure on the price of the major market indexes.Of course, I don’t know if this will lead to a 10% market correction, a deeper one, or a shallower one. However, this technical set-up does typically result in a decline of some degree. I don’t think the decline would go further than 10% without some other unexpected negative news.Outlook for the Federal Funds Rate in 2024The big news that the market is anticipating in 2024 is when the Federal Reserve will begin to lower the Federal Funds rate. Lowering interest rates typically stimulates the economy as it lowers the cost of borrowing expensive items such as homes, vehicles, furniture, appliances, etc. Lower interest rates can also stimulate business expansion, which can create new jobs.The Federal Reserve held rates steady over the past three months after a series of rate increases to lower the inflation rate. The consensus among policymakers is that there will be at least three 25 basis point rate hikes in 2024. However, it seems reasonable that the Federal Reserve will not rush into lowering interest rates in Q1. The policymakers will probably hold rates steady in the first few months of the year while watching the inflation and the unemployment rate trends.I would take a guess that the most optimistic scenario for the first rate cut would be at the March meeting. Even under that scenario, that leaves plenty of time for the market to pullback on profit taking without any significant positive news. The March Federal Reserve meeting is scheduled for March 21 & 22. The news of the first rate cut would probably lead to another rally in the market. In the meantime, my viewpoint is that the market won’t have much positive news to stimulate significant moves higher before the announcement of the first rate cut.New/Existing Home SalesOne of the biggest leading indicators for the economy is the sales of new and existing homes. Declining trends in home sales can eventually lead to a recession.New Home Sales in 2023 (in thousands) (Trading Economics)The chart above shows a declining trend in new home sales since July 2023. There was a significant drop off of 12% in November 2023 as compared to October. This indicates that higher mortgage rates are likely suppressing the demand for new homes.Existing Home Sales in 2023 (in thousands) (Trading Economics)Although there was a slight bump up in November as compared October, there has been an overall sharp decline in the sales of existing homes since February 2023. This reinforces the idea that higher mortgage rates have been suppressing the demand for homes.Sales of new and existing homes are an important indicator for the economy since it is one of the major purchases that consumers make. Home sales also leads to other large purchases such as renovations, furniture, appliances, HVAC systems, etc.If the declining trend continues in the home sales reports announced in January and February, it could lead to further selling in the stock market. Without significant changes in mortgage rates, I wouldn’t expect the next couple of home sales reports to change the declining trend much.Negative Guidance for Q4 2023 EarningsNegative earnings reports for most companies for Q4 2024 could put negative pressure on the major stock indices. Company earnings reports for Q4 2023 will be reported during Q1 2024. Earnings season begins in early to mid-January. Analysts and the management of S&P 500 companies have been more pessimistic for Q4 2023 earnings outlooks. S&P 500 analysts have lowered their earnings estimates for Q4 by 5.8% since September 30. The decrease was larger than the 5-year average of -3.5% and the 10-year average of -3.3%. The majority of S&P 500 company leaders are also issuing negative guidance for Q4 2023 earnings. The percentage of companies issuing negative EPS guidance for Q4 is 65%. This is higher than the 5-year average of 59% and the 10-year average of 63%.The analyst consensus Analysts and the management of S&P 500 companies. This is significantly lower than the 5-year average EPS growth rate of 10.6% and the 10-year average EPS growth rate of 8.4%. If the majority of the actual earnings reports turn out to be negative, it would likely put negative selling pressure on the S&P 500 index. Another factor is what guidance the companies give for future quarters. If most companies offer pessimistic viewpoints for future quarters when they report earnings for Q4 2023, it would also likely have a negative impact on stock prices.The Bottom Line Outlook for Q1 2024Overall, the technical set-up will probably have the largest impact on the stock market’s direction in Q1 2024. Profit taking among large investors looks likely after the recent rally. That is exactly what occurred after the rally through July 2023. The S&P 500 had a similar bearish divergence set-up, leading to the market sell-off between August and November. Profit taking & market pullbacks after strong rallies are what I’ve observed in multiple time frames in the past. The current bearish divergence technical set-up shows that the rally is likely waning as we begin 2024.Of course, there are other factors such as the declining trend in new & existing home sales and a lackluster corporate earnings outlook for Q4 2023 which will be reported in Q1 2024.Another large factor will be what the Federal Reserve says about the direction of interest rates. I think it is reasonable that the Fed will probably pause at least at the January and February meetings. So, I doubt there will be much positivity to spark a rally for most of Q1. Of course, unexpected positive news such as a spike in new home sales, a significant dip in the inflation rate, better than expected corporate earnings & guidance, and/or an earlier than expected rate cut would likely negate my thesis.More By This Author:Adecoagro: Stock Has Strong Growth Potential In 2024PayPal Stock May Have Finally Found The Bottom (Technical Analysis)Bitcoin: Multiple Time Frame Price Analysis (Technical Analysis)