The S&P 500 is on target to surpass it’s high made on January 3, 2022 of 4,818.62, and is likely to hit a target zone between 4,800 to 4,900.
Let’s take a look at a few fundamental reasons why this is possible.
Inflation is trending down
Firstly, CPI is starting to trend downwards, CPI for July came in at 3.2% YoY, while core CPI print came in at 4.7% YoY. Shelter alone contributed to 90% of the CPI print in July last month, and the effect of pricing on the shelter component has yet to be fully felt yet. There currently is a disconnect between the shelter effect on inflation and actual home prices and rent which actually has been falling. Due to the way the Bureau of Labour Statistics collects data with regards to Consumer Price Index, there will exists some long and variable lags between actual housing and rent prices. For renters, shelter inflation includes rent and utility payments. For homeowners, the BLS looks at what it would cost to rent a similar house. Inflation in other parts of the economy also contribute to inflation. If the cost of lumber rises, so does the cost of building a home. The effects of shelter will continue to play out in the remaining months of 2023, and will eventually help slow the shelter component down.
Labour market continues to soften
Additionally, softening of the labour market will continue as interest rates are likely to remain high for a longer period. Unemployment rate jumped to 3.8% in August from 3.5% in July. Nonfarm payrolls increased by 187,000 jobs last month after rising by 157,000 in July. Job growth averaged 150,000 per month over the past three months, sharply down from 238,000 in the three months through May.
According to the CME FedWatch tool, traders now price in 94% chance of no hike in the September 19-20 meeting, while there remains a slim 6% chance of a 25 basis points hike to bring the Fed funds rate to 5.5% to 5.75%.
Technical Analysis
From a technical perspective, the price action does suggest that the uptrend will continue. Firstly, let’s look at the weekly chart, we can see that the pullback in July found support at the weekly 20 exponential moving average.
From a daily perspective, the daily 20 exponential moving average is now above the 40 exponential moving average, implying short term bullish uptrend is in play. Additionally, the 50 daily moving average is above the 150 daily moving average, and the price action is still above the 50 daily moving average, implying medium term bullishness in the price action. Lastly the price action is above the 200 daily moving average, with the 200 moving average in an upslope, implying long term bullishness in the price action. After pulling back by around 5.89% and finding support at 4,330 and at the 100 daily moving average, the market has clearly made a price action reversal pattern. Lastly the bullish green ice cream candle made on Friday August 25 indicates a retest of the swing low made on August 16.
However, there exists 2 resistance levels at 4,600 & 4,800, where is very much likely that traders will attempt to take profits at the levels and there will likely be additional pullbacks and corrections as the market trends back towards an all time high of 4,818.62. The bullish thesis could easily be reversed if somehow inflation decides to spike back upwards, and force the Federal Reserve to raise interest rates beyond 6%, or a worser than expected recession takes place in China, as they currently are experiencing a property crisis and falling consumer prices.
September might spring a surprise
Lastly, September tends to be a weak month for the stock market. However, when Jan is up by more than 5% and August is a down month, September is up 6 of 8 times with solid gains, while the rest of the year (September to December) ended higher every single time.
Source: Carson Research
Comments
I will continue to monitor my portfolios and watch for opportunities to buy or sell. Too much liquidity and too much millisecond trading and macro determinants as well.
It’s easy money, low interest rates throughout history that have led to the greatest market booms and corrections. I’m not so sure that a significant market correction is in the cards. At least not until the Fed tightens monetary policy enough.
Today, the relatively high rate expectations are offset by relatively high earnings expectations, primarily led by the tech sector being propelled by strong earnings recovery and guidance (including AI enthusiasm). The relatively higher 10 year rate is the reason the market is still lower, nearly two years from the all time high, despite record earnings forecasts.
CPI may be ticking higher as is Core PCE. Unemployment in the US and EU are at historically low levels. The Central Banks appear to be slowing their upward Fed Funds rate trajectories and they are hoping that the long and variable lags of monetary policy will do its magic. I'm not sure sure it will because I don't think their rates are high enough.
Some day the market will go down, but predicting the timing is devilish. Since August 10, 1982, when the Dow was 782, I believe that it has gone up significantly, with some bumps along the wat.