Stock Market Forecast for the Week Ahead: Will the Mania Continue?

Stock Market Forecast: Bearish

Stock Market Forecast for the Week Ahead: Will the Mania Continue?

The investing world was thrown into disarray last week when a band of Reddit-based retail traders ignited an apparent short squeeze in GameStop’s stock. Filled with FOMO and eager to join in on the effort, more retail traders then began piling into other stocks with high short interest – hoping to spark a similar squeeze. The surge in a few select names dominated financial news media and is prevalent in discourse outside traditional market-related mediums.

Video Explainer – GameStop Short Squeeze and Other Reddit Favorites

Public outrage ensued when brokerages began limiting access to the shares in question which expanded the phenomenon, drawing the attention of regulators and public officials across the country. The short squeeze has since ballooned into a remarkable moment in popular culture. These individual investors have created an incredibly complex situation, however, and the idea that “stocks only go up” – a rallying cry of some newly minted GameStop shareholders – is a dangerous falsehood.

It is under these circumstances that market participants should look to past bubbles, manias and financial crises for insight as many have ended in disaster. Further still, it is important to understand one’s exposure when investing and to practice proper risk management. There is no telling how long the event will last and losses can mount when normal market conditions prevail and it is time to exit the trade.

Dow Jones, Nasdaq 100, S&P 500 Forecasts

Outlook: Bearish

The ongoing phenomenon has undoubtedly disrupted the regularly-scheduled programming of the market, as earnings from Facebook, Apple and Tesla – in addition to a FOMC rate decision – went relatively unnoticed last week. Quarterly reports are set to continue in the week ahead with big names like Alphabet, Amazon, Alibaba and Exxon.

Source: IG

Friday will see the release of non-farm payroll data for January which will provide a crucial update on the state of employment in the world’s largest economy. Recent NFP prints have disappointed, revealing a slowing economic recovery in the wake of coronavirus. Echoed by the Federal Reserve’s findings last week, another disappointing print could derail market sentiment further.

Nasdaq 100 Price Chart: 4 – Hour Time Frame (November 2020 – January 2021)

Nasdaq 100 Chart

Nasdaq Trading Basics: How to Trade Nasdaq 100

That said, the broader indices may continue to struggle as bullish sentiment dissipates and some large institutional players rush to reposition capital amid the ongoing rally in single-stock names with high short interest. Since the longer-term outlook remains encouraging in my view, a pullback in the coming weeks could provide intriguing set-ups for bullish exposure.

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DAX 30 & FTSE 100 Forecasts

Outlook: Neutral

Across the Atlantic, the DAX 30 and FTSE 100 will look to Euro Area GDP data and a Bank of England rate decision. With US equities in the driver’s seat in terms of sentiment, volatility and price action, the European indices may continue to loosely track their American counterparts. In the meantime, follow @PeterHanksFXon Twitter for updates and analysis.

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–Written by Peter Hanks, Strategist for DailyFX.com

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