Bull Market Hits Key Resistance Level, but Prepare for a 'Roller Coaster' as the Year-End Approaches

The stock market has recovered most of the losses since the BTC-led crypto sell-off, but now faces clear difficulty as it meets a key resistance zone from a technical perspective. With the year-end approaching, investors are increasingly cautious about asset allocation, even though certain catalysts, such as a potential rate cut, could still push the market higher. The risk-reward profile is now balanced again. Investors can maintain a constructive view, but there remain meaningful headwinds to consider, and here is what investors should prepare for.

Technically speaking, while the crypto decline appears to have stabilized, a resilient economy and anticipated rate cut helped propel the Nasdaq 100 into a V-shaped recovery. Still, the index remains below the November 12 high, which has now become a critical resistance level. If it breaks above this psychological marker, a short-term bullish continuation could be confirmed. However, as long as the index fails to print a new high, calling this a fully established bull market would be premature.

Since crypto has become increasingly linked to risk assets, any renewed deterioration could spill over into equities, while another rally could lift sentiment, as we have seen throughout recent weeks. It is encouraging that Bitcoin found support around the 80,000 level, and the large swings between Monday and Tuesday suggest a "higher-low" setup from a short-term standpoint. Still, this does not imply that the landscape is entirely clear. We remain neutral or mildly pessimistic on crypto, as the broader pattern of "lower highs and lower lows" signals continued downward pressure.

The key takeaway is that investors should continue to prefer equities over crypto, as the long-term AI thesis remains intact. AI-driven tech stocks have shown renewed strength, with competition between Google and ChatGPT, and semiconductor momentum between Broadcom and Nvidia, highlighting the ongoing innovation cycle. Yet uncertainty around crypto could weigh on sentiment at times, though any spillover into equities may ultimately create attractive buying opportunities in leading AI names.

One meaningful catalyst for broader sentiment could be the rate decision next Wednesday, where consensus expects another 25 basis point cut. If that happens, we would view any initial market surge as a potential opportunity to take profits, as relying too heavily on monetary easing can be risky, especially if Powell downplays the future rate path.

As we have emphasized repeatedly, the December cut is likely to become a central market focus. The 25 basis point adjustment is more psychological than impactful, as the real economic influence will be far more limited than market behavior may suggest. Fundamentals remain the primary driver. That is why we previously recommended buying the dip after Powell's hawkish remarks on easing, yet now we suggest reducing exposure as the cut arrives.

The logic is rooted in Powell's reluctance to deliver a December cut. In November, the Fed chair acknowledged solid economic growth and mild unemployment rate, noting there was no urgency to adjust policy. He favors a patient stance, as prior easing still needs time to filter through the economy, and there is little urgency to act while growth remains steady despite recent disruptions. If the current policy range of 3.75 to 4% shifts to 3.5 to 3.75% after the December cut, it could leave limited flexibility for 2026, since the cut itself would not be strictly necessary.

It is almost certain that if the cut occurs next Wednesday, FOMC officials will show greater division regarding future easing, or possibly even align around maintaining rates unchanged through 2026, which could be reflected in the dot plot. Powell may also temper expectations for next year's path, as robust growth combined with easier policy could complicate inflation trends. Some may speculate about Powell's influence given his upcoming retirement in May, but he will remain on the Board of Governors through 2027, and his guidance still carries significant weight.

In essence, while the Fed may deliver a cut sooner than it would prefer, mainly to hedge against uncertainty caused by missing economic data during the shutdown, this could flatten the outlook for 2026, and Powell may even adopt a more hawkish tone, prompting investors to reassess risks seriously.

The worst-case scenario would be no rate cut at all, as the current conditions do not demand immediate action. Such an outcome, though unlikely, could spark significant volatility given the market's elevated expectations. Therefore, profit taking may occur as soon as the decision is announced or even in anticipation of it, particularly if Powell injects further uncertainty into the guidance and forces markets to recalibrate their assumptions.

In conclusion, as the bull market reaches a pivotal testing range and may even challenge recent highs before the meeting, caution is warranted. First, the crypto decline may not be over, and its broader bearish structure could pressure risk assets. Second, expectations for next week's Fed meeting are high and could act as a double-edged factor, potentially amplifying volatility as we head into the final stage of the year. Still, fundamentals remain the anchor, and any dip in AI-related equities should be viewed through the lens of a continued long-term growth story.