Consolidation/reversal area for the S&P 500?
Updated
The S&P 500 sold off until June, when expectations of monetary tightening peaked. Since then, the index has powered off the June lows as the growing likelihood of recession makes it less tenable for the Fed to keep raising rates.
I suspect that interest rate expectations will continue to "drive the ship," and that stock prices will peak or consolidate whenever market expectations for a "dovish pivot" peak or consolidate.
Currently, FOMC FedWatch futures are pricing a 75% chance that the Fed will hike 50 bps in September, and a 25% chance that the Fed will hike 75 bps:
cmegroup.com/trading/interest-rates/countdown-to-fomc.html
In November, the market is expecting a target rate of either 3% (75% chance) or 3.25% (25% chance), and in December, the market's placing about even odds that we end the year at either 3% or 3.25%. So in all, the market expects the Fed target rate to be either 75 bps or 100 bps higher than the current level by year end.
This is slightly more dovish than the Fed's own projections. The current Fed dot plot indicates that the median forecast by FOMC members is that they will raise the target to 3.25% by year end.
So, I think market expectations are now about where they should be. That suggests to me that most of the big gains in stocks are now behind us, and that the S&P 500's price may be entering a zone of consolidation as it approaches the 200-day EMA.
We definitely could see market expectations get even more dovish if economic data stay soft. For instance, maybe the consensus for September will move to a 25 or 50 bps hike. But if the economic data looks that bad, then the stock market may find other reasons for pessimism. A strong dovish pivot could also cause inflation expectations and commodities prices to rise again, which could throw a wet blanket on the stock market rally as well. I wouldn't expect ES to be able to get much father than 4320 without causing inflation to heat up and the Fed to flip hawkish again.
Bottom line: I think there's still some runway for stocks to move higher toward that 200-day EMA, but I wouldn't expect them to immediately go soaring off into a new bull market. More likely, they get a little more tentative here and consolidate for a while in this range.
I suspect that interest rate expectations will continue to "drive the ship," and that stock prices will peak or consolidate whenever market expectations for a "dovish pivot" peak or consolidate.
Currently, FOMC FedWatch futures are pricing a 75% chance that the Fed will hike 50 bps in September, and a 25% chance that the Fed will hike 75 bps:
cmegroup.com/trading/interest-rates/countdown-to-fomc.html
In November, the market is expecting a target rate of either 3% (75% chance) or 3.25% (25% chance), and in December, the market's placing about even odds that we end the year at either 3% or 3.25%. So in all, the market expects the Fed target rate to be either 75 bps or 100 bps higher than the current level by year end.
This is slightly more dovish than the Fed's own projections. The current Fed dot plot indicates that the median forecast by FOMC members is that they will raise the target to 3.25% by year end.
So, I think market expectations are now about where they should be. That suggests to me that most of the big gains in stocks are now behind us, and that the S&P 500's price may be entering a zone of consolidation as it approaches the 200-day EMA.
We definitely could see market expectations get even more dovish if economic data stay soft. For instance, maybe the consensus for September will move to a 25 or 50 bps hike. But if the economic data looks that bad, then the stock market may find other reasons for pessimism. A strong dovish pivot could also cause inflation expectations and commodities prices to rise again, which could throw a wet blanket on the stock market rally as well. I wouldn't expect ES to be able to get much father than 4320 without causing inflation to heat up and the Fed to flip hawkish again.
Bottom line: I think there's still some runway for stocks to move higher toward that 200-day EMA, but I wouldn't expect them to immediately go soaring off into a new bull market. More likely, they get a little more tentative here and consolidate for a while in this range.
Note
Okay, ladies and gents, I think the game just changed. Interest rates can only "drive the ship" as long the economic downturn happens slowly, so it can be offset by a more dovish Fed. If economic downturn happens too quickly, then interest rates become irrelevant. And the newest economic data out this morning suggests that it could happen very quickly. The median price of a new single-family home is down 12% in the last two months, the fastest drop in history. Housing is a leading indicator for the economy. The market is reacting this morning as if this news might not bee all that bad, because it means a dovish Fed. Give it a little time, and I think reality will set in and markets will realize that this news is very bad, and that if the economy goes into a rapid downturn, the Fed won't be able to move fast enough to help. Look for a possible significant selloff in stocks this week, IMO, but a rally in government bonds.
Note
After only about a week of consolidation, it looks like we've broken solidly through the top of my consolidation zone on today's better-than-expected CPI print. Market is so far betting that the Fed will successfully engineer a "soft landing."Note
More bad economic data out today. Empire State manufacturing index down to recessionary levels, and NAHB homebuilder survey very weak. I still think we're near an inflection point where price action in stocks will turn bearish again, as the interest rate story fades and the economic slowdown story comes to the forefront. We're also very near the level I identified in the OP as the likely near-term max:I stand by that; I don't really see us getting above that level without a significant pullback.
Note
I mean, even *I* can't quite believe how precisely this played out.Note
Sure looks like we're going all the way down to the 200-week EMA, but if we bounce or consolidate before then, I'd guess it happens in one of the green zones.
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