S&P at a turning point

١٠ يناير

With little in the way of economic data, and ahead of key inflation numbers and the start of the fourth quarter earnings season, the path of least resistance for US stock indices appears to be ‘up’. While the US majors ended yesterday’s session with modest losses, they certainly closed well off their lows. Given the sharp rally on Monday, it feels as if the bears have been put back in their box for now. The question is: will they stay there? Could it be that the pull-back which began ahead of New Year and ended after the release of Friday’s stronger-than-expected Non-Farm Payroll report is all the correction we get? It currently looks as if it could be, even though it feels like the sell-off has been far too mild given the size and speed of the rally since the end of October. In addition, for bullish investors, there’s still some unfinished business. While the Dow and NASDAQ made fresh record highs at the end of December, the S&P 500 came up short. But perhaps the bulls should exercise some caution now. Tomorrow sees the release of the latest inflation update in the form of CPI, with wholesale inflation numbers following on Friday. On top of that, some of the US’s largest financial and healthcare corporations release their fourth quarter earnings at the end of this week, so there’s a lot to play for. Investors appear to have shrugged off the implications of last week’s strong Non-Farm Payroll report in relation to Fed rate cuts. But if tomorrow’s data shows hotter-than-expected inflation numbers, they may not be so forgiving. Earlier today, the yield on the 10-year Treasury note fell back below 4.0%, and that is offering some support to US equities.

The chart of the daily S&P 500, as seen above, shows that the index remains in the upper half of the bullish trend channel which has been building since the October 2022 lows. The upside momentum has faded a touch as can be seen from the MACD as it turns lower. But this chart has to resolve soon. Either we see a sharp rally taking us back over 4,800 and then taking out the all-time high around 4,818. Or we pull back below 4,700 giving us an indication that a deeper corrective move is coming. That could indicate that the top is in for now. Or it could set us up for a larger and more protracted rally. Tomorrow’s CPI may be the catalyst for the resolution.