To The Moon

The SPDR S&P 500 ETF Trust (NYSE:SPY) is up 6.9% year-to-date despite ongoing concerns over persistently high inflation, a tight labor market and rising interest rates. DataTrek Research co-founder Nicholas Colas recently tried to make sense of the fact that Wall Street and the Federal Reserve seem to be on two completely different pages when it comes to the outlook for the U.S. economy.

Broke the downtrend, above 200MA

Economic indicators suggest a recession may be just around the corner, but you certainly wouldn't know it by looking at the stock market's performance so far in 2023.

Investors may be anticipating economic conditions and Fed behavior will change very quickly in 2023. "It’s not that they are in denial about the possibility of an economic downturn. Rather, they are anticipating a shift in monetary policy because of the recession the model is so clearly predicting," Colas said.

Inverse head & shoulders

Equities have lost steam in the US this month afterJanuary's sizzling rally, and the coming week couldsay a lot about where they go from here. The tension between elevated valuations and a still hawkish FED could become even more intense. Data on consumer demand, manufacturing, inflation and the economy are due along with minutes from the lastestFOMC meeting and a host of speeches from central bank officials.

The bond market is currently pricing in three more 0.25% interest rate hikes in March, May and June. However, the Fed may be forced to pivot from tightening to loosening monetary policy sooner than expected if the U.S. economy falls into a recession quickly. It underscores how fragile stocks could be ifthe Fed does hike rates further that had been expected at the start of the year.

Doesn't look pretty short term

Economic data is real-time or even lagging, while the stock market is forward-looking. The S&P 500 may have already priced in a 2023 recession in 2022, and its 2023 resiliency is from investors looking beyond the coming recession to another period of economic growth and low-interest rates.

The New York Fed's U.S. recession probability index based on Treasury spreads is currently sitting at its highest level in more than 40 years, even higher than its peaks prior to the bursting of the dot com bubble and the 2008 global financial crisis.

Signs of weakness with lower low 

SPX started to show weakness over the past 2 days failing at 4100. If SPX breaks under 4060, it will dive to 4015 and 4000. Looking at puts below 4060 and calls above 4100 on Monday.

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