Image Source: Pixabay 

• The S&P 500 had a strong performance in 2023, but the technical and fundamental outlook for Q1 2024 looks bearish.
• Technical analysis suggests a bearish divergence, indicating a potential decline in Q1 2024.
• Large investors may start selling to lock in profits, putting negative pressure on major market indexes.

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 Divergence

SPDR 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 2024

The 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.

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