S&P 500 Falters Before It Can Notch a Breakout, What History Says of Trends from Here
S&P 500, VIX, Dollar, GDP, Recession and NFPs Talking Points:
- The Market Perspective: S&P 500 Bearish Below 4,075; USDJPY Bearish Below 134.00; EURUSD Bullish Above 1.0100
- Despite the momentum that had built behind the S&P 500 through the end of July, August opened for the S&P 500 with a notable falter before clearing the next notable resistance
- Seasonality may take on greater weight after Monday’s trip up for risk assets, but fundamentals like recession fears will continue to play an outsized role
Riding the Momentum but Short of Summitting the Technical Peak
In seems that in the transition from week and month to the next that speculative enthusiasm has dried up – and at an important technical and fundamental junction. The momentum that the S&P 500 – as a benchmark for ‘risk trends’ – mustered through the end of this past week seemed to quell the malignant themes of recession concerns and the 2022 tumble into a technical ‘bear market’ was, at the very least, knocked back Monday. My preferred, imperfect measure of sentiment, the S&P 500, both failed to notch a fourth consecutive day’s rally through Monday and failed to overtake the midpoint (sometimes refereed to as the ’50 percent Fibonacci retracement’, though that doesn’t exist) of the range from the March 29th peak to June 17th trough. With a technical pause, the fundamental concerns around a possible US recession and the assumptions tied to a seasonal tide rise in volatility levels can start to color market expectations. Thus far, the rebound has merely found delay. Yet, there is plenty of fodder to urge the bears back into influence should the masses decide to reprioritize.
Chart of S&P 500 with 50 and 100-Day SMAs, Volume and COT Positioning (Daily)
Chart Created on Tradingview Platform
While there are an array of fundamental hurdles that could justify the sense of hesitation, it may also be that seasonal expectations are kicking in. For the month of August, the S&P 500 has historically averaged a gain over the past hundred plus years, but it is a significantly smaller advance that what has been seen in July. What’s more, the significantly shorter life of the VIX volatility index shows a strong upward trajectory in expected volatility through this month – on its way to a peak in September and October. On a more granular level, the weekly breakdown of the same volatility measure shows a significant reversal from the belly of the doldrums from the 30th to the 31st week of the year as the start of a progressive climb in activity levels. This is not an insurmountable historical norm, but it seems just enough disruptions to tip the fine balance of the market.
Chart of VIX Volatility Index Weekly Performance (Weekly)
Chart Created by John Kicklighter
The Structural: Or Why This Time May Be Different
‘This time is different’. It is an overused axiom, but it one that has a rooting in practical market application. In the transition of last July to August, risk trends were able to point higher for through the first half of the later month while volatility readings were kept under control. The same period is 2020 was seeing the deflating of pandemic risk premium and 2019 was infected with outright inertia. Yet, foundational circumstances change from year to year, conditions which can systemically override relative seasonal influences. A critical differentiation this go around is the withdrawal of cheap funding and the perception of a external backstop for investors. I often talk to the extreme stimulus with which major central banks flooded the system over the past decade along with the critical turn we have seen this year; but there is a knock on effect as to the cost of leverage. Below, we have the NYSE’s broker-level ‘leverage’ (difference in credit and debit balances) which shows a sharp reversal in such exposure.
Chart of S&P 500 Overlaid with Broker Level ‘Leverage’ at NYSE (Monthly)
Chart Created by John Kicklighter with Data from FINRA
From ‘market conditions’ to ‘fundamentals’, the state of affairs around economic health represents a systemic change which continues to exert serious influence. While the US 10-year to 2-year Treasury Yield spread (the ‘2-10 spread’) remains significantly inverted in a ‘recession warning’ signal, we have yet to seen any official call on the entrenchment of the US economy – the world’s largest. That is not unusual historically, but it has been made even more complicated a situation after the official body declaring such states (the NBER) preemptively undermined the market’s generally agreed-upon definition of two consecutive quarters of negative GDP. I asked in a Twitter poll whether people believed the US was already in a recession or not, and there isn’t exactly a definitive call. Rather than open the door for ‘hope’ to spur an earlier recovery, I believe the ambiguity simply makes the path forward that much unstable.
Twitter Poll on Whether the US is in a Technical Recession
Poll from Twitter.com, @JohnKicklighter
The Fundamental Sparks Ahead and Interesting Markets to Watch
As we move into Tuesday trade, my top focus remains on the various scheduled and unscheduled indicators that a recession slowly approaches. Google search interest around the plague-like term eased from last week, but that isn’t a surprise given the presence of the negative 2Q GDP update. Monday’s ISM manufacturing report gave some brief reprieve from economic fear. The headline figure for July registered a smaller slip than expected (52.8 vs 52.0 expected) with a notable jump in employment (47.3 to 49.9) and sharp drop in the inflation gauge (78.5 to 60.0). The US economy is much more heavily rooted in service sector employment and output, which will make Wednesday’s survey an important measure to watch. In the meantime, the earnings and the JOLTS job quits/openings data will suffice. In the meantime, monetary policy will continue to stir interest with some notable Fed speaks while the RBA is expected to hike 50bps to a 1.85 percent benchmark at its Tuesday morning meeting.
Global Calendar of Major Macro Economic Event Risk for the Next 48 Hours
Calendar Created by John Kicklighter
For interesting markets, the lack of follow through on the S&P 500 is a pace setter for many risk-leaning assets. There aren’t as many measures that are in technically-loaded a position as the US index however. Meanwhile, EURUSD is in a precarious chart position itself as its range from the past four weeks is a terminal wedge that will soon run out of room. That will lead to a break either of necessity or conviction. The outcome will be determined on what motivations arise around the technical pressure. The Dollar’s retreat is of meaningful interest its benchmark cross, but the pullback on USDJPY paints its own interesting backdrop. The pair has dropped over 6 percent in the past few weeks between the Greenbacks own struggles and the added boost in the Yen across the spectrum. One other market worthy of watching is the Canadian Dollar. The ‘Loonies’ hit this past session was significant enough that it overwhelmed the USD’s pressure for a USDCAD advance. That said, CADJPY better aligns the courses while GBPCAD is interesting for closing above its 50-day moving average for the first time in 114 trading days. Let’s see what the Canadian PMI does later today.
Chart of EURUSD with 50 and 100-Day SMAs, COT Net Speculative Futures Positioning (Daily)
Chart Created on Tradingview Platform
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