S&P 500 WEEKLY OUTLOOK: BEARISH
- S&P 500 falls below last week’s low and briefly enters bear market
- The near-term outlook for U.S. stocks remains bearish
- The April PCE report could be the next big price action catalyst in the week ahead
U.S. stocks had another horrible week and suffered heavy losses, with the Nasdaq 100 falling4.45% and the S&P 500 dropping 3.05% over the last five trading sessions. The year has been brutal for equities, but to put numbers on it, the Nasdaq 100 has plunged nearly 28% in 2022 amid broad-based tech sector weakness, sparked by growing headwinds for the economy, including rising real rates, red-hot inflation, and rapidly cooling economic growth. The S&P 500 has also sold off, briefly entering bear market on Friday after setting a new 2022 intra-day low at 3,810, a move that saw the index rack up a more than 20% drop from its January peak.By Friday’s close, however, the top benchmarkerased its daily decline and no longer met the official definition of a being in a bear market.
In any case, risk appetite has plummeted of late as sentiment has turned very bearish on fears that the Fed may not be able to engineer a soft landing as it pursues an aggressive tightening cycle aimed at restoring price stability and, of course, credibility.
While the Fed has ruled out raising borrowing costs in 75 basis point increments, it has done little else to ease Wall Street‘s concerns about the massive rout in the equity space. In fact, the bank has recently doubled down on hawkish rhetoric, indicating that it will continue to withdraw accommodation until there is clear and convincing evidence that inflation is coming down, even if the process involves moving the policy stance above neutral.
With the recession narrative gaining traction, CPI readings at four-decade highs, corporate earnings slowing amid margin compression, and the central bank hell-bent on tamping down inflation with forceful measures after waiting too long to act, the case for a meaningful rebound in stocks is feeble. In fact, the S&P 500 and Nasdaq 100 are likely to remain biased lower in the coming weeks, with sellers fading every rally and buying more downside protection in the options market (the 10-day average of Cboe’s put-call volume ratio for single stocks surged to the highest level since the 2020 COVID-19 collapse).
Looking ahead to next week, the economic calendar is packed with relevant data, but the highlight will likely be the Core Personal Consumption Expenditure report, the Federal Reserve’s preferred inflation gauge. That said, April Core PCE is seen retreating to 4.9% y/y following a 5.2% y/y increase in March. For sentiment to improve, the data will have to confirm that price pressures peaked in the first quarter and are beginning to roll over quickly. If the numbers come below expectations, we could potentially see a strong rally, amplified by lower liquidity ahead of the Memorial Day Holiday. The opposite is also true: a worse-than-expected reading could trigger a violent sell-off, exacerbated by scant volume.
S&P 500 TECHNICAL ANALYSIS
After the recent sell-off, the S&P 500 has fallen towards cluster support, running from 3,805 to 3,800, where the lower boundary of a short-term descending channel converges with the 38.2% Fibonacci retracement of the 2020-2022 rally. If the index manages to break below this area in the coming days, selling momentum could accelerate, paving the way for a move towards 3,710, followed by 3,635. On the other hand, if dip buyers resurface and trigger a bullish reversal, initial resistance appears at 3,950, and 4,100 thereafter.
S&P 500 Chart
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—Written by Diego Colman, Market Strategist for DailyFX