Volatility surged almost precisely on cue this year. From mid-July to the first week of October, the S&P 500 dipped over 8% from recent peaks. Traditionally, this week marks the final stretch before we transition into the holiday season. However, we still anticipate key data points that could introduce market turbulence, particularly this week’s PPI and CPI reports. Energy prices spiked by over 8% last month. Still, with the recent slack in housing data, we might observe a slowdown in shelter costs, potentially balancing out the rising fuel and heating expenses.
Seasoned technicians often resort to longer-dated charts to gain clearer insights into market technicals, especially when stock movements seem erratic. So, let’s delve into some technical indicators to guide us through year end.
Last week, the SPX was just approximately 15 points shy of the 200-day Simple Moving Average (SMA) – a crucial threshold the market seemed willing to approach but not surpass. Interestingly, the E-mini-S&P 500 futures did breach the 200-day SMA during intraday trading before systematic buying propelled the market upwards. The weekly chart presents an even more compelling narrative. The 50-week SMA is on the verge of surpassing the 100-week moving average, signaling a long-term bullish pattern seen only three times in the past two decades. This comes especially after the 20-week SMA overtook both the 50-week and 100-week averages in mid-July. Considering the weekly Stochastic indicator – which primarily assesses current price relative to its ten-week closing price range – the “fast” average has already crossed the oversold threshold and is tilting upwards. This suggests an early bottom indication, although the longer-term D moving average hasn’t bottomed out yet. On a weekly chart, the K line typically offers a more reliable bottom forecast. Additionally, the Relative Strength Index, which evaluates recent price change velocity, is also trending upwards, as is the CCI (Commodity Channel Index), hinting at a potential market rally. While monthly charts show some caution, they often lag interim bull runs, sometimes by years.
Inflation still bears some lingering base effects, granting the Fed a brief respite for the year. Challenges will intensify next year when “sticky” inflation truly manifests. Unfortunately, Middle Eastern regional conflicts could profoundly disrupt global trade and longstanding alliances. Historically, over the past 30 years, the Federal Reserve hasn’t hiked interest rates at a conflict’s onset without providing clear prior notice, as seen at the start of the Russia/Ukraine conflict. Currently, the Fed’s messaging remains somewhat ambiguous regarding the upcoming hiking cycle, emphasizing data-driven policy decisions. It may merely be a coincidence, but it’s plausible that the Fed might choose to delay imminent actions due to the unpredictable ramifications that could alter energy supply chain dynamics. Stay nimble my friends.