After heavy selling pressure comes a big bounce. Ironically, today’s bounce in stocks appears to be triggered by softer-than-expected US data. The rationale is that weaker data will discourage the Fed from tightening its belt further, and simultaneously increases the chances of a sooner-than-expected rate cuts. But let’s not jump into any conclusions as the monthly data can be quite volatile. The Fed looks at the trend of data than month-over-month volatility. More evidence is needed to reverse the sharp bullish repricing of US monetary policy that has helped to propel the dollar to new highs on the year and bond yields to their highest levels since 2007.
Bad news = good news for stocks?
As mentioned, the stock market reversal coincided with the publication of some weaker US data, in particular pending home sales. They plunged 7.1% in August from the month before after the 0.9% monthly increase recorded in July. This was a LOT worse than expected (-1.0%). We also found out that GDP was left unrevised, against expectations of a positive surprise.
Investors will be looking forward to some more important data releases, starting on Friday with the Core PCE Price Index. Next week, we will have ISM Services PMI and the monthly jobs report to look forward to.
Rising oil prices and mortgage costs could hold markets back
More concerning for investors and central banks right now is the rising prices of crude oil, which should make stagflation even worse for oil-importing countries in the Eurozone, Japan and China, among others. This comes as borrowing costs have skyrocketed across the developed economies. In the US mortgage rates surged to a 23-year high this week, providing yet another blow to the housing market. According to Freddie Mac, the rate on the average 30-year fixed mortgage increased to 7.31% from 7.19% the week prior, reaching levels last seen in the year 2000.
With oil prices rising and mortgage costs on the rise, consumers will feel the pinch, and this will eventually translate into lower profits for companies.
S&P 500 technical analysis
The big question after today’s bounce is this: can the bulls defend the gains?
At the time of writing, the S&P had gone above Wednesday’s high of 4297. This level is now the most important support to watch on the daily time frame.
If the S&P holds above here, then this would be the first bullish sign in weeks. In this case, we may then see some further upside momentum towards the more significant resistance area between 4335 to 4356 (grey shaded area on the chart).
However, if the S&P goes back below that 4397 level, especially on a closing basis, then that would strongly indicate that today’s rally was all just a good old bull trap. In this scenario, then bulls’ stops – likely to be resting below the low of today and that of Wednesday – would be in trouble.
-- Written by Fawad Razaqzada, Market Analyst