So much for the “January Effect”: Here are five things that could hinder the U.S. stock market rally in early 2024.

Rather than providing a tailwind for the market, several people interviewed by MarketWatch said the market is losing momentum as investors scramble to take profits after the S&P 500 rose 24% in 2023, according to FactSet data. There were concerns that the “January effect” might work in the opposite direction.

“I think every time there’s a big burst like this, it’s susceptible to profit-taking,” James St. Aubin, chief investment strategist at Sierra Investment Management, said in an interview with MarketWatch. “After a strong rally, no one would be surprised if the market cools down a bit.”

From high valuations to bullish sentiment indicators, economic data, geopolitics, and more, there are several things that could trip up the market in January.

US stocks are already overbought

For the past month, technical indicators widely used by Wall Street portfolio managers and technical analysts have been screaming that U.S. stocks are overbought.

The 14-day Relative Strength Index for the S&P 500, a momentum indicator that is said to help understand the magnitude of the index’s recent movements, rose to 82.4 on Dec. 19, and rose to 82.4 in 2020, according to FactSet data. It was the highest value since 2017.

The RSI has since fallen back, but remains hovering around 70, which analysts consider the threshold for something to be considered “overbought.”

Sentiment changes from extremely bearish to extremely bullish

In just two months, investors have gone from incredibly bearish to incredibly bullish, according to the American Association of Individual Investors’ weekly sentiment survey.

This should give investors pause, as this gauge is considered a reliable counter indicator. When sentiment gets tense in either direction, it can signal that the market is about to turn. Investors say this is what happened in July and again in October after the S&P 500 reached its 2022 bear market bottom.

Nearly 53% of respondents said they were bullish, the highest since April 2021, according to the AAII survey released before the Christmas holidays. This number has fallen slightly this week, but is still high compared to October levels.

VIX is abnormally low

Wall Street’s favorite “fear gauge” is clearing everything. For some, that’s reason enough to worry.

Cboe Volatility Index VIX, better known as Vix, is a measure of implied volatility, or how high volatility traders expect the S&P 500 index to be next month, based on trading activity in option contracts tied to the index. Measure what you are doing.

In December, the Vicks Index fell below 12 for the first time since before the emergence of the COVID-19 pandemic.

Nancy Tengler, CEO and CIO of Laffer Tengler Investments, said in an emailed commentary that she is keeping a close eye on Vicks. If volatility starts to rise, investors should consider taking some chips off the table.

Inflation progress may stall in January

Some investors are already worried about the next US inflation report, due out on January 11th.

Core CPI rose more than 0.3% in December, according to the Cleveland Fed’s inflation nowcast. If this proves accurate, it would be the hottest inflation rate since May.

And even if core inflation declines slightly, stock prices may not be greeted with the same enthusiasm they have shown in the past.

“We expect the US consumer price index to continue to show a disinflationary trend in December, but the question is whether this same dynamic will allow it to continue rising.” Raymond James Chief Investment Officer Larry Adam said in his emailed comment.

Earnings season can be disappointing

For three consecutive quarters starting in the last three months of 2022, revenues at America’s largest companies shrank from a year earlier.

This “earnings recession” finally ended in the third quarter, but the question now facing investors is whether companies can meet Wall Street’s lofty expectations heading into 2024.

The boom in artificial intelligence software and the fact that the U.S. economy avoided recession in 2023 have boosted analysts’ confidence in earnings, strategists said.

Analysts expect S&P 500 total returns to increase 11.7% in calendar year 2024, according to FactSet’s bottom-up consensus estimates.

“The market has been looking at this 11.7% earnings growth number for some time. That’s a very optimistic view,” Goldman said in an interview with MarketWatch.

That’s not all…

Admittedly, this list is not exhaustive.

Politics and geopolitics also came up frequently in discussions with analysts. Investment experts cited the upcoming Taiwanese presidential election, another impending federal debt ceiling showdown in the United States, the start of the 2024 Republican presidential primary, Gaza and Ukraine as potential threats to market calm. This includes ongoing conflicts.

Some have expressed concern that the Treasury Department’s next quarterly repayment announcement in early 2024 could trigger a selloff in bonds and stocks.

But in Cetera’s Goldman view, the dynamic that Wall Street traders call “buying the rumor and selling the news” may pose a greater threat.

This idea works like this: Investors are already on the front lines of aggressive interest rate cuts by the Federal Reserve. Therefore, if the Fed implements its policy, the rush to take profits could cause major U.S. indexes to fall instead of hitting new highs. In other words, many strategists believe investors are already pricing in fairly aggressive rate cuts from the Fed.

So unless the central bank finds a way to deliver something that exceeds Wall Street’s expectations, major U.S. stock indexes may struggle to continue rising.

“The market is already buying into the narrative that we’re going to have a better 2024, that the Fed is going to cut rates, that they’re going to cut rates more broadly,” Goldman said.

“Maybe it’s already factored in.”