Do you really want to fight the FED?
The current week will bring a lot of exciting events for market participants. Several big corporations are set to disclose their earnings for the fourth quarter of 2022, and the release of important financial data (Dallas FED Manufacturing Index, Chicago PMI, ISM Manufacturing, employment cost, CB consumer confidence, ADP employment change, etc.) is likely to give more mixed signals about the economy. As if it was not enough, U.S. central bankers are expected to raise interest rates by 25 basis points on Wednesday.
We believe the FED’s rate hike will further weigh on the economy, resulting in more mom-and-pop businesses going bankrupt due to soaring debt servicing costs (and persistent inflation). Inadvertently, this will put more pressure on the labor market, which we expect to start revealing more underlying economic problems in the coming months. This view coincides with the Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents from December 2022. These projections show that the FED anticipates the median unemployment rate to reach 4.6% in 2023.
As a matter of fact, since 1949, each 1% increase in unemployment has accompanied a recession (unemployment in December was 3.5%). Therefore, we would argue that the FED implicitly points to a recession in the second half of 2023. Furthermore, the market sentiment is becoming overly bullish and complacent while not pricing in a significant economic downturn. As a result, we think market conditions are moving closer to creating a perfect setup for a big repricing event. With that said, we remain bearish on SPX (beyond the short-term) and maintain our price target at $3 400.
Some of the companies reporting their earnings this week:
Illustration 1.01
Illustration 1.01 shows the daily chart of SPX. The yellow arrow indicates the bullish breakout above the sloping resistance. Now, we will pay close attention to the price action. If the price breaks above the horizontal resistance, it may further bolster the bullish odds in the short term. Contrarily, the failure of the price to break above this level may signal exhaustion.
Technical analysis
Daily time frame = Bullish
Weekly time frame = Slightly bullish
Illustration 1.02
Illustration 1.02 displays the weekly chart of SPX. Yellow arrows indicate the price’s retracements toward the 50-week SMA, which represent corrections of the primary trend. Recently, the price broke above the 50-week SMA (unlike on the previous occasions). However, this does not necessarily mean the primary bearish trend has reversed. To support a bullish case in the short-term, we would like to see the price hold above the 50-week SMA. The breakout below this moving average will be bearish and hint at exhaustion.
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
We believe the FED’s rate hike will further weigh on the economy, resulting in more mom-and-pop businesses going bankrupt due to soaring debt servicing costs (and persistent inflation). Inadvertently, this will put more pressure on the labor market, which we expect to start revealing more underlying economic problems in the coming months. This view coincides with the Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents from December 2022. These projections show that the FED anticipates the median unemployment rate to reach 4.6% in 2023.
As a matter of fact, since 1949, each 1% increase in unemployment has accompanied a recession (unemployment in December was 3.5%). Therefore, we would argue that the FED implicitly points to a recession in the second half of 2023. Furthermore, the market sentiment is becoming overly bullish and complacent while not pricing in a significant economic downturn. As a result, we think market conditions are moving closer to creating a perfect setup for a big repricing event. With that said, we remain bearish on SPX (beyond the short-term) and maintain our price target at $3 400.
Some of the companies reporting their earnings this week:
- Apple
- Alphabet
- Amazon
- Exxon Mobil Corp.
- Pfizer
- McDonald's
- Caterpillar
- Phillips 66
- Spotify
- Meta Platforms
- Canon
- J&J Snacks Foods
- NXP Semiconductors
- Ryanair Holdings
- SoFi Technologies
- Whirpool Corp.
Illustration 1.01
Illustration 1.01 shows the daily chart of SPX. The yellow arrow indicates the bullish breakout above the sloping resistance. Now, we will pay close attention to the price action. If the price breaks above the horizontal resistance, it may further bolster the bullish odds in the short term. Contrarily, the failure of the price to break above this level may signal exhaustion.
Technical analysis
Daily time frame = Bullish
Weekly time frame = Slightly bullish
Illustration 1.02
Illustration 1.02 displays the weekly chart of SPX. Yellow arrows indicate the price’s retracements toward the 50-week SMA, which represent corrections of the primary trend. Recently, the price broke above the 50-week SMA (unlike on the previous occasions). However, this does not necessarily mean the primary bearish trend has reversed. To support a bullish case in the short-term, we would like to see the price hold above the 50-week SMA. The breakout below this moving average will be bearish and hint at exhaustion.
Please feel free to express your ideas and thoughts in the comment section.
DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.
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