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S&P 500 Increasingly an Outlier of Calm Ahead of Fed’s Jackson Hole

S&P 500 Increasingly an Outlier of Calm Ahead of Fed’s Jackson Hole

John Kicklighter, Chief Strategist

S&P 500, VIX and Dollar Talking Points

  • The S&P 500 managed to hold to its channel this past week, but other ‘risk-sensitive’ assets have threatened to break seasonality and slide
  • Among the other markets that reflect sentiment, we have seen crude oil, Yen crosses and emerging markets break lower, posing an existential threat
  • Top event risk this week is the Jackson Hole Symposium which will build on the Fed’s Taper speculation but GDP and Covid will be in the wings
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Seasonality is an Average and a Number of Risk Assets are Breaking Norms

There is a lot to take from seasonal trends in the financial markets. One of the most consistent influences for the markets is the liquidity drain that comes during the summer months for the Northern hemisphere. The period often referred to as the ‘summer doldrums’ is considered a statistical support for a bullish bearing, but far more reliable is the severe slump on participation which in turn helps to curb the development of trends while also amplifying short-term bouts of volatility. If this past week is any indication, the week ahead will likely be dealing with a growing pressure to breach the broader market’s calm and tip the financial system into a ‘risk off’ environment – the kind of sweep that can upend the entire market. That threat has its bulwarks however and nowhere is the effort more pronounced than with the S&P 500 and Dow. Both were under pressure this past week but ultimately held their well-defined technical trends that stretch back to the beginning of the recovery from the pandemic lows. Will they be able to hold their pre-destined path with the Jackson Hole Symposium ahead?

Chart of the SPDR S&P 500 ETF with Volume and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

Taking a look at the seasonal norms behind the S&P 500 (as a benchmark for ‘the market’), it is worth recounting the averages for the month of August. On a trading-day adjusted basis, this month represents the nadir of participation for the calendar year. Those thinned conditions can – and do – translate into more acute levels of volatility, but the conversion of activity into sustained trend is a significant fire gap. That results in a fairly reserved average for speculative (SPX) performance over the long term. We have definitely seen a drain on market participation and an amplified degree of volatility in turn this year. However, it is important to remember that these are averages with outliers. While statistically improbable, it is very possible that this August can usher in a dramatic turn in activity. Typically, markets tend to start filling back out overtly in the second or third week of September when various market holidays pass. However, systemic upheavals, such a ‘risk’ cascade, don’t always abide such norms.

Chart of S&P 500’s Performance, Volume and Volatility via VIX Per Calendar Month

Chart Created by John Kicklighter with Data from Bloomberg

While the S&P 500 may have held to its technical guylines, other benchmarks for sentiment that I monitor are on a very different track. Where a singular reference for sentiment (like a US index) is convenient, it will suffer somewhat for accuracy as market perspective is a much broader perspective than any singular measure is capable of encompassing. While the SPX and Dow may have checked higher to maintain the general bull trend, global equities have reflected greater struggle. The VEU ‘rest of world’ equity ETF for example dropped -3 percent this past week. A rather benign carry trade pair, EURJPY dropped a third consecutive week six month lows; while crude oil dropped for seven consecutive sessions to take out serious support at 65 and emerging markets via the EEM ETF has steadily slide to a nine-month low. Some of these developments are still nascent, but others have an unmistakable maturity to their struggle. If the balance of trend finds stubborn US indices the ‘odd market out’, my assessment of risk will shift to suit the market’s convictions.

Chart of 12-Month Rolling Performance of Risk-Sensitive Assets (Daily)

Chart Created by John Kicklighter with Data from Bloomberg

The Top Fundamental Drivers for Volatility and Trend In the Week Ahead

As provocative as the technicals may seem, I track fundamentals for their ability to urge markets along their way. There are a few probable market-moving themes on deck as systemically influential ahead. On the docket, the advanced August PMIs for the major developed economies is due Monday. Given the growing concern over the post-pandemic recovery pace, such a definitive update can prove a serious boon or burden. Just as influential but lacking the benefit of a definitive timeline is the spread of the coronavirus. Cases in the United States hit 260,000 per day this past week – just off of the record set back in January. Officials have actively pushed back against the notion of another economic shutdown in an attempt to halt the spread, but consumers may make that decision for politicians if they chose to stay at home. If you are looking for the top, known fundamental theme ahead; the Jackson Hole Symposium from August 26th through 28th is my top listing. Anticipation around the Federal Reserve’s eventual policy shift represents one of the most pervasive market scenarios on the horizon. I will be watching specifically for rhetoric from Fed Chairman Powell and his colleagues to suggest a Taper announcement is coming at the September 22nd policy event.

FOMC Scenario Table for September 21-22 Meeting

Table Created by John Kicklighter

While the relative implications of US monetary policy seems an obvious fundamental lever for the Dollar, the implications for global risk trends should not be overlooked. While we have seen a meaningful economic recovery since the depths of the pandemic, speculative sentiment has invariably run far beyond the traditional measures of growth. That additional amplitude can in large part be traced back to the exogenous support offered by the world’s largest central banks. Collectively, the balance sheets of the Fed, ECB, BOE, PBOC, BOJ, RBA, BOC and RBNZ have surpassed $32 trillion. I don’t believe the stimulus-SPX a relationship of mere correlation but rather causation. Therefore, if it becomes clear that the world’s largest central bank intends to curb is purchases of assets in the near future, the lift for such benchmarks is likely to flag.

Chart of S&P 500 Overlaid with Aggregate of Major Central Banks’ Balance Sheets (Monthly)

Chart Created by John Kicklighter with Data from Bloomberg

There is little doubt in my mind that we have seen a tactical effort from the Fed to acclimate the market to a probability of a near-term taper announcement. We would see that message in both the FOMC minutes as well as a range of the Fed speak dotted throughout the period. Yet, while the Dollar (DXY Index) seemed to be metabolizing the news into a technical break to nine-month highs, there was very little consistency in the actual interest rate projections. Notably, the US 10-Year Treasury yield would actually slide this past week while the implied yield through the end of next year was essentially unchanged. So it should come as little surprise that the Dollar’s efforts to clear 93.50 (DXY) and 1.1700 (EURUSD) would be met with a swift stall. It is possible that the Jackson Hole Symposium and/or PCE deflator on Friday can change the equation, but I will maintain a perspective of skepticism regardless.

Chart of DXY Dollar Index with 100-Day SMA Overlaid with Implied Fed Funds Hikes (Daily)

Chart Created on Tradingview Platform

Markets to Watch This Week With Very Different Potential

Looking over the many charts for high liquidity assets, there is a lot of impressive technical development through which traders can work out. That said, I still believe there is an existential fork for which the markets can take moving forward. On the one hand, there is the possibility of a full reversal in risk trends that pulls ‘risk’ assets down universally. I consider a 4,350 break from the S&P 500 or 34,000 for the Dow to be a remarkable shift. However, for the time being, crude oil’s impressive slide will be high on my threat assessment list with a seven consecutive session tumble that has pushed the markets close to its 200-day moving average this past week.

Chart of US Crude Oil with 100 and 200-Day SMAs with Consecutive Candle Count (Daily)

Chart Created on Tradingview Platform

In contrast to the broad economic and speculative role that the aforementioned crude development would represent, GBPUSD’s global macro footprint is materially smaller. That is a favorable perspective if the view for markets is an ultimate hold of the speculative boundaries. The cable has marked meaningful progress this past week in a slide towards 1.3600, but that move only carries the cross to significant support in the form of a ‘neckline’ for a head-and-shoulders pattern that has essentially developed throughout 2021. Make or break, you should have an option in mind for the next move forward.

Chart of GBPUSD with 100-Day SMA (Daily)

Chart Created on Tradingview Platform

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