The SP500 has rallied from recent lows but still is very overbought historically and we expect the rally to end and more selling to unfold – logic of the trade and the key levels of support and resistance to look out for below:
The fundamentals for stocks are bearish
We are seeing the momentum in leading economic indicators slow and on the other side we have Fed rate hikes.
“I think there’s a series of hikes coming, but it’s really the Fed being more hawkish than expectations that alarms markets.” (Fundstrat’s Tom Lee)
Markets don’t seem to alarmed looking for just 2 50 bps hikes and then a possible pause but the Fed will continue to hike every month into year-end in our view.
Federal Reserve Vice Chair Lael Brainard said last week that it’s unlikely the central bank will be taking a break from its current rate-hiking cycle anytime soon.
Though she stressed that Fed policymakers will remain data-dependent, Brainard said the most likely path will be that the increases will continue until inflation is tamed.“Right now, it’s very hard to see the case for a pause,”
The market is not pricing a hawkish Fed also the balance sheet is being reduced and stimulus is being withdrawn which was responsible for up to 90% of the rally from the COVID outbreak lows.
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The Fed in June has begun reducing the asset holdings on its nearly $9 trillion balance sheet.
By September, the balance sheet reduction will be as much as $95 billion a month, which Brainard said will equate to two or three more rate hikes by the time the process is finished.
Despite the recent fall in stocks, they remain at bubble levels which we can see on the charts below
In terms of stocks, the recent rally looks corrective in nature and we expect the down trend to resume.
Technical Levels of Support and Resistance to Watch
On the monthly chart below we have rallied back but remain below the 20-month moving average and also the 4200 level.
Levels of support we think could be targeted longer-term are 3200.00 then 2800. On the daily chart, if we broke 4200, we would sell back through the level with a stop behind 4300.00.
If we don’t break higher and break support at 4100 we would view it as a sell with a stop behind the 4200 level.