Stock Market Commentary, Analysis and Stock picks - Dec 20

Inflation, Fed, or Options Expiration: What’s Driving the Market?

Last week, we flagged a potential hurdle in our commentary: monthly options expiration on Friday. With many of the Mag7 stocks at record highs, soaring call premiums caught market makers’ attention. As part of the "Maximum Pain Theory," market makers often work to reduce in-the-money call premiums during expiration week, leading to temporary slowdowns. That prediction played out as Mag7 stocks saw sharp declines on Wednesday and Thursday following the Federal Reserve’s meeting.

Tesla, which soared to $486 on Wednesday after a jaw-dropping 100% gain over six weeks, was hit hardest, plummeting to $419. Other Mag7 stocks followed suit, taking a collective tumble. But it wasn’t just options expiration triggering the volatility—two heavyweight factors also came into play: the Federal Reserve’s interest rate decision and inflation reports.

In fact, a time comes when every party hits a lull, the stock market hit that point this past week.

1. Federal Reserve Interest Rate Decision (Wednesday)

The Fed announced a 0.25% rate cut, lowering the federal funds rate to 4.5%, while signaling a slower pace of cuts in 2025. Their hawkish tone and emphasis on maintaining elevated rates to hit the 2% inflation target rattled investors, sparking short-term volatility.

• Market Reaction:

  • The Nasdaq dropped sharply, leading the losses on Wednesday.

  • By Friday, markets clawed back some ground, but the S&P 500 closed the week down 2%, the Nasdaq dipped 1.78%, and the Dow Jones lost 2.25%, marking its longest losing streak in 50 years.

  • Small stocks in the Russell 2000 faced the brunt, tumbling 4.5% due to shifting monetary policy expectations. However, the index remains up 11.87% year-to-date.

2. Inflation Reports (Friday)

On Friday, the PCE price index (the Fed's go-to inflation measure) provided a glimmer of hope:

• Inflation rose 0.1% month-over-month, the smallest increase in six months.

• Core PCE (excluding food and energy) held steady at 2.8%.

• Consumer spending grew 0.4%, reflecting robust demand.

Market Reaction:

• Stocks rebounded strongly on Friday, with Tech giants like Nvidia and Apple leading the charge. Investors became optimistic about a potentially more accommodative Federal Reserve stance in 2025.

3. Options Expiration and Maximum Pain Theory

While the Fed’s decision and inflation reports stirred the pot, options expiration likely played the dominant role in last week’s market turbulence.

• The "Maximum Pain Theory" explains how market makers often steer prices toward the strike price where the most options contracts (calls and puts) expire worthless. This benefits options sellers at the expense of buyers. For stocks like Apple, Tesla, and Broadcom, market makers seemed to actively suppress prices, causing a temporary drag on their upward momentum.

Volatility and the Road Ahead

The VIX (Volatility Index) surged 74% on Wednesday, hitting 27, before retreating to 18.36 by week’s end. While the holidays may slow down trading activity, we expect the rally to regain momentum in the early new year. For now, temporary setbacks like options expiration and monetary policy jitters are part of the broader market narrative, not its conclusion. The bias remains toward lower rates as the economy and earnings are expected to grow, with inflation gradually declining toward the 2% target. In summary, while markets may experience greater volatility in 2025, the long-term stock rally trend is likely to remain intact.

The performance of the different indices last week is summarized as follows:

Index Friday (12/20) Weekly Monthly YTD 1 Year

S&P 500: +1.09% -1.99% +0.23% +24.34% +26.23%

Dow Jones Ind: +1.18% -2.25% -1.31% +13.67% +15.53%

Nasdaq 100: +0.85% -2.25% +3.01% +26.53% +28.60%

Nasdaq Composite: +1.03% -1.78% +3.20% +30.39% +32.44%

Russell 2000: +0.64% -4.50% -3.62% +11.87% +14.39%

S&P 500 Sectors: Weekly Performance

Here's how the 11 S&P 500 sectors performed during the last week:

Sector Weekly Performance

Technology (XLK) -1.29%

Utilities (XLU) -1.56%

Financials (XLF) -2.08%

Health Care (XLV) -2.12%

Staples (XLP) -2.56%

Industrials (XLI) -2.63%

Discretionary (XLY) -2.79%

Communications (XLC) -2.95%

Materials (XLB) -4.09%

Real Estate (XLRE) -4.76%

Energy (XLE) -5.69%

Technology reduced its losses on Friday with a rebound led by Nvidia and Apple capped the week with a modest 1.29% decline, as investors cheered inflation data. Utilities also provided a safe-haven demand which helped limit losses, but the sector still fell 1.56%. Health Care also played defensively with a dip of 2.12%. The Consumer Discretionary struggled under Tesla’s steep drop but bounced slightly, ending the week with a 2.79% loss. Materials sector was also affected by broader market weakness and declining commodity prices, finishing down 3.4%. However, the hardest hit was the Energy sector which dropped by 5.69% last week. This was mainly caused by the falling crude oil prices, a strong dollar and the Fed’s more hawkish tone for the next year raising fears of prolonged higher borrowing costs which contributed to the overall weakness of the energy space. The sector ETF XLE is down by 12% in December, its worst monthly performance since June 2022.

Important Events next week:

Next week will be a shortened week because of Christmas break. Not much expected in the week.

Monday (12/23): Chicago PMI (Dec)

Thursday (12/26): S&P Global US Manufacturing PMI, Atlanta Fed GDPNow

Friday (12/27): ISM Manufacturing PMI (Dec)

Important Earnings this week:

Holiday week. Majority of Companies have already reported earnings for Q3.

Long-Term Stocks:

Our long-term stocks are those in which we have the conviction that they have strong business fundamentals and enjoy moats in their respective industries; hence the chances of long-term profits are high.

MSFT:

Microsoft continues to consolidate at current. As such we think it is well poised to move forward and test its previous high of 466.57 and remains our long-term favorite.

NVDA:

It was mentioned last week that Nvidia has been moving sideways (in fact drifting lower slowly) as it is waiting for the semi-conductor group to move ahead after a tremendous run over the last year. We think Nvidia is waiting for some economic or news event and could sharply rise again it is forming a cup w/handle pattern here.

AAPL:

Apple bucked the trend and ended the week on a positive note at all time high once again proving its leadership qualities. Apple remains our favorite long-term leader and aggressive investors could add to their existing positions at the current levels with a stop loss below 237.

COST:

Costco made a new high and then dropped sharply last week for 4 days and finally found support at its 50-days EMA. Any pullback to its moving averages around 911-935 will be an opportunity for investors who like this long-term leader and will resurface to capture a good opportunity.

Medium- and Short-Term Picks:

Google:

Alphabet was mentioned last week as a potential long-term leader. The sharp market pullback was not enough to bring Google below its key moving averages. Looks like it is pausing here before it tries to break beyond the 200 level. It was mentioned that it was likely to come down to 181-185 range which it did and provided a bounce. If that entry was missed, then it is still actionable with a stop loss below 176.

META:

Meta lost another 5.58% this week and is likely to go further below and test 550-560 range. Till that time, it is better to observe META’s moves. Any sustainable move above 601.36 will reverse the short-term pullback otherwise the stock could continue to consolidate at current levels.

AMZN:

Market’s sharp drop finally pulled Amazon from the top of its breakout range, and it found support at its 20-Days EMA. Watch for the action, if Amazon moves beyond 226.21 then it will attempt to test its highs again at 233 otherwise it could consolidate or fall back to 200 levels. Amazon is still enjoying Santa Clause rally, but the overall market sentiments and a workers’ strike could hold the upward movement.

PLTR:

PLTR’s continuous strength seems unstoppable, and it is again showing tremendous strength. Although technical indicators show that it is in an overbought territory, the momentum could cause it to move beyond previous highs at 80.91. If it breaks out, then aggressive investors could add to their position (or add a small new position) with a stop loss below 70.82.

As mentioned earlier, this is another AI winner and for the time being remains market favorite.

Interesting Stocks for Actions and Watchlist:

New Picks:

SPUS:

We are introducing an ETF for the first time. SPUS is a modified proxy to SPY (the popular S&P 500 ETF) and has outperformed the traditional ETF in all time frames since its inception five years ago (For last five years it returned 113.98% vs 84% for SPY). It is currently at an interesting level. If it breaks out beyond 43.76 then it is likely to move ahead along with the broader market. Suggested stop loss at 41.05.

Hubs:

HubSpot is a CRM / Customer interface software developer and is showing up on several screens. Any move above 724.61 in strong volumes will be bullish targeting previous high at 762.67 and beyond.

CCL:

Cruise operators and Travel stocks (including airlines) are on fire and Carnival Cruise is no exception. Friday’s move was very bullish and targets recent highs of 27.17. The stock is actionable with a stop loss below 50-days EMA at 23.89.

DOCS:

Doximity is a software provider for medical professionals. The stock is actionable at current prices and has made a very bullish move on Friday, eyeing its recent highs of 61.75. Suggest a stop loss below 47.50 (although above the 20-days EMA line).

Recently Picked Stocks:

TSLA

On Tuesday, we alerted our readers through Threads, Facebook and WhatsApp Group that Tesla is likely to experience a pullback amid monthly options expiration on Friday. This is exactly what it did and retreated from a high of 480 to 421. It looks like it is going to test its breakout level at 414.60 or even the 20-days EMA at 398.83 at which it is expected to get support again provided the overall market sentiment remains favorable (hence actionable at these levels). After which Tesla (being Tesla) could again restart its journey to reach new heights.

TSM

We reiterate our stance on TSM as an actionable semiconductor stock with a buy point at 205.50. An aggressive entry could be made at current prices, but it is better to wait for a breakout beyond 205.5.

ANET

ANET reached a new high before retreating along with the market and finding support at 20-days EMA. Mentioned three weeks ago, ANET continued to move higher. Suggest moving the stop loss to 100 or 102.49 (50-days EMA) as the trend is likely to continue.

ANF

ANF recovered its prior week losses and gained 8% this week besides a market sell-off on Wednesday and Thursday. It looks like it is setting up for a move either breaking out beyond 163.96 (at which point the stock will become actionable for an upward move) or moving back to 50-days EMA. Any move below 131.09 will be a sell signal if an 8% loss is not triggered.

ALAB

Astera Labs continued to impress us besides a sell-off during the middle of the week. Its recovery seems bullish and shows strong investors’ interest in it. The stock is close to an all-time high and is likely to continue its uptrend but seem extended as it is riding its upper Bollinger band. We recommend securing some profits at the 20-25% level and keep riding the uptrend as long as it lasts.

CMG:

Chipotle lost another 4.21% this week. We have mentioned this stock several times during the past weeks and think that it will ultimately move back to test its previous highs of 69.26. Aggressive investors could take a small position at current levels with a tight stop loss below 60 (just below 50-days EMA).

VRT:

VRT triggered a stop loss last week. Let’s also park this stock in a watchlist till it repairs the broken structure during the recent move.

GE:

GE consolidated at the lower edge of the trading range and gained 1.42% last week. We think that this stock is still actionable, targeting a move above 194.80 while a stop loss below 155.

HD

Home Depot gained 1.97% last week. We are still waiting for the moving averages to catch-up with the price for an alternate entry. Till that time let’s put it in a watchlist.

AVGO:

We mentioned last week that Broadcom is extended and is likely to experience a pullback which occurred amid the monthly options expiration.

The stock is consolidating now and could test 210 to move back or further below to 200 at which point it will become actionable for now.

Website:

Note: Our website is now up and running. Please review our offers and if interested in our Excel based software, the TR (Trend Recognition) Indicator and the commentary then you could purchase it on:

https://analyzestocks.net

or visit our Etsy store at:

https://www.etsy.com/listing/1540978608/advanced-excel-stocks-analysis-and

All customers will continue to receive the Market commentary for a period of 1 year from the date of the purchase.

Follow us on Facebook: https://www.facebook.com/profile.php?id=61552548116888

Follow us on Threads: https://www.threads.net/@analyzestocks?hl=en&xmt=AQGziO6tlaC0EPODJbcgfFfP1BbWKvISSctP5P5R6-L89lE

Subscribe to our YouTube channel to obtain the latest news and information about our products at

https://www.youtube.com/channel/UC8aS_P5xpWUDVG5IDdSjGEg

Happy Trading and best regards,

Disclaimer:

The information provided here is for educational / learning purposes only and should not be taken as purchase or sell recommendations. Trading / Investing in Stocks and derivatives is highly risky and could result in a substantial or complete loss of invested capital.

Employees and Owners of MJ Software LLC are not registered Financial Advisors with FINRA or SEC and for any financial advice please consult a registered financial advisor.