Thanksgiving Week Trading Surge Raises Concerns of Potential Market Pullback

As the Thanksgiving week unfolded, a departure from the norm was witnessed in stock trading patterns, with heightened activity leading up to the holiday and substantial fluctuations in key stocks such as Microsoft, Amazon.com, Adobe Systems, and Meta Platforms. Surprising market dynamics continued even after the holiday, as these stocks achieved 52-week highs on November 22.

Closing the trading day on November 22, the S&P 500 Index exhibited an 11% increase from its October 27 low, reaching 4,104. An important metric of momentum, the relative strength index (RSI), surpassed 71.3, indicating that the index may be overbought and potentially poised for a pullback. Similar trends were observed in other indices, with the Nasdaq Composite Index registering an RSI of nearly 72 and the RSI for the Dow Jones Industrial Average finishing at 71.2, influenced notably by Microsoft’s new 52-week high.

Traditionally, an RSI above 70 serves as a warning of potential pullback, and levels above 75 suggest a likelihood, while an RSI above 80 signals an imminent selloff within a few days. These thresholds are closely monitored by trading algorithms, indicating that market decisions are increasingly driven by automated processes.

Examining historical patterns, the Nasdaq-100 Index experienced an RSI of 76 in mid-July, preceding a significant correction lasting until the end of October. Post-correction, several tech stocks witnessed immediate rebounds, with notable gains in Apple, Amazon.com, Alphabet, Meta Platforms, Microsoft, Nvidia, and Tesla.

Considering the current RSI data, the potential for a pullback appears moderate. However, the intricacies of market dynamics extend beyond RSI levels, incorporating factors such as interest rates, economic trends, and geopolitical realities. Analysts anticipate continued stock market gains into the new year, although the robust gains since October might lead to more subdued increases by the end of December.

While a pullback is not necessarily catastrophic, it presents an opportune time for investors to exercise caution, closely monitor market movements, and identify potential investment opportunities that may arise during this period of market recalibration.