FUNDAMENTAL
OVERVIEW
The correction in the S&P 500 has finally started as the hot NFP number
last Friday acted as a wake-up call for the hawkish Fed risks.
The rally in April was justified by easing US-Iran tensions, the constant
push for a diplomatic resolution instead of another full-fledged war and
expectations that a deal would be reached eventually.
The gains in May, on the other hand, were driven more by FOMO rather than
fundamentals which is the part that generally offers mean-reversion
opportunities as markets get overstretched. I wouldn’t be surprised if the
stock market were to erase all the May’s gains.
The core problem is that the Fed might be forced to tighten policy into a
negative supply shock. This is bad for growth expectations and therefore for equity
prices. The “good news” is that Trump will lose his leverage with a falling
stock market which could eventually force him to reach a deal and get the
Strait of Hormuz reopened.
The bad news is that we don’t know what’s going to be his pain threshold,
so the stock market could fall quite a bit before we get a breakthrough in negotiations.
Today, all eyes will be on the US CPI report. Yesterday’s and today’s price
action suggests there’s likely been some hedging into potentially hot data.
Some conspiracy theorists have also raised suspicion that Trump and Co. might
have leaked the data and the moves were due to insider trading. I’m not into such
conspiracy theories. The moves started with the NFP, and they are likely to extend
into the FOMC as there’s the risk of a more hawkish than expected Fed.
A soft CPI could trigger a relief rally and then the market might consolidate
into the FOMC. A hot CPI, on the other hand, might exacerbate hawkish Fed
worries and push the market into new lows.
S&P 500
TECHNICAL ANALYSIS – DAILY TIMEFRAME
On
the daily chart, we can see the S&P 500 probed below the key 7,350 support zone yesterday but
eventually erased the losses to finish the day above the support. The price is
now breaking below the support again and this time the drop might be sustained
into the 7,200 support next. If the price gets there, we can expect the dip-buyers
to step in with a defined risk below the support to position for a rally back into
record highs. The sellers, on the other hand, will look for a break to increase
the bearish bets into the 7,050 level next.
S&P 500
TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME
On
the 4 hour chart, we can see
more clearly yesterday’s selloff which might have been caused by hedging into a
potentially hot US CPI report. The price is now breaking below the support
again, so we can expect the sellers to pile in here with a defined risk above
the broken support to target the 7,200 level next. The buyers, on the other
hand, will want to see the price rising back above the broken support to
position for a rally back into the 7,500 level.
S&P 500 TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, there’s
not much we can add as the sellers will likely continue to push towards the 7,200
support, while the buyers will look for an opportunity around the 7,200 support
or wait for the price to rise back above the broken 7,350 level. Tomorrow, we get the latest
US Jobless Claims figures and the US PPI report. On Friday, we conclude the
week with the University of Michigan consumer sentiment survey
