S&P 500 Forecast: Rare Reversal Price Action in US Markets, Traders Switch to Sell the Rip

[MongiIG]

S&P 500 Analysis and News

• Rare Price Action in US Indices
• Market Participants Flip from Buying the Dip to Selling the Rip
• Has the Powell Put Been Reached?

Flipping From Buying the Dip to Selling the Rip Mentality

A rarity in yesterday’s price action with the S&P 500 recovering from an intraday loss of more than 3.98% for only the third time. Now while a recovery in the index from such a sizeable drop may look encouraging, giving a sense that “buy the dippers” are back, the other two times that this had occurred was during 2008 on October 16th and 23rd. As such, in light of the aggressive bid into yesterday’s close, market participants have used this to sell the rip. Ultimately the factors behind the sell-off remain unchanged thus far and all eyes will be on the FOMC meeting tomorrow.

The move across equity markets is largely in response to the aggressive hawkish Fed outlook. At the start of the year, the forecast for the Fed was 3 rate hikes in 2022 and the possibility of quantitative tightening at the end of the year. Fast forward two weeks and now the consensus is for 4 rate hikes with liftoff in March (5-6 hikes if you believe Jamie Dimon) and quantitative tightening (QT) as soon as Q3. That is quite the shift and if most remember how QT went during 2018 (Figure 1), it wasn't exactly a great time for equity markets and other risk-on assets like Bitcoin. . What's more, geopolitical tensions between Russia and Ukraine are not helping sentiment and thus prompting traders to reduce exposure to equities and seek safe havens such as US treasuries, the Japanese Yen and the Swiss Franc.

 

Figure 1. S&P 500 and Bitcoin Performance in 2008

Source: Refinitiv

As mentioned above, this week the major focus is on the Federal Reserve, where there is a possibility that the Fed could abruptly end its QE taper (currently expected to end in March). The reason being is because employment is near full capacity and of course inflation is sitting at a lofty 7%. The fact that the Federal Reserve is still doing QE is somewhat crazy. That being said, the main attention will be placed on Chair Powell's presser and he will be well aware of the recent stock market turbulence. This is where I think there is a potential for a rebound in equities, on the basis that Powell fails to live up to the uber hawkish expectations. In turn, this is about finding out whether we have reached the Fed put, or is it much lower, in which case, equities will reprice lower.

Of note, there has been academic research on the Fed put, which is an interesting read.

• The Economics of the Fed Put

For now, risks remain tilted to the downside for risk assets, which could quite easily change should Powell provide some words of encouragement in terms of signalling that market pricing of Fed tightening is possibly a bit too aggressive. That said, the first point of resistance resides at the 200DMA, while key resistance sits at the 50% fib of the correction from the record high at 4520, which I would call the bull and bear line. In other words, bearish below and bullish on a close above.

S&P 500 Chart: Daily Time Frame

Source: Refinitiv

 

Jan 25, 2022 |  Justin McQueen, Strategist. DailyFX