S&P; 500 outlook sours as market fills, volatility underplays risks

Talking Points on the S&P; 500, Liquidity, GDP, Chinese Dollar and EURCAD

  • The business perspective: S&P; 500 bearish below 4,000; USDJPY bearish below 132
  • Liquidity is back at full pressure after the US holiday weekend, but the UK market shutdown will disrupt full market flow
  • GDP has been an active theme in the last session following the US manufacturing PMI, Australian GDP and China’s Caixin services; but monetary policy will continue to compete for total influence


Risk trends in a new month and summer trading conditions

Markets continued to fill after a long holiday weekend in the United States, which drastically dampened speculative appetite thanks to benchmarks on the brink of catastrophic trend determination. Liquidity can act to stabilize uneven markets, but it seems that the rush to market depth we’ve seen recently represents more of a destabilizing influence going forward. The problem is that the relentless trend based on speculative certainty fueled by artificial means like central bank stimulus is being actively reversed. While the risk is widespread, the sense of hope remains for many benchmarks. For the S&P; 500, we closed a very suspicious month. For one thing, the recorded “doji” helped avoid an official plunge into “bear market” territory and generally matches a reversal pattern in tech textbooks. On the other hand, there is no tense technical trend to reverse with such urgency and there is unrelenting fundamental pressure on the downside between inflation, monetary policy tightening and lower growth expectations. How would you describe these markets in the medium term?

Chart of the S&P; 500 with volume, SMA over 50 months and wicks (Monthly)

Chart created on Tradingview Platform

Boosting the time sensitivity scale, the same S&P; 500 (as a benchmark for sentiment) saw its inspiring charge through the end of last week come to a halt. The three-day rally through Friday was a huge nearly 6% rally. Such a move can easily fuel anticipation that legitimate fundamental issues have been ignored, allowing speculative appetite to once again take over the country. However, I believe the rally was mostly the result of a temporary liquidity slump rather than a genuine shift in conviction. The difference is that the rally would more likely lose traction and retrace most – if not all – of its bounce. Volatility levels are still excessively high and a deeper market backdrop only serves as a reminder of financial problems that continue to worsen.

Chart of the S&P; 500 with 20-day SMA, daily wicks and 20-day ATR (Daily)

S&P 500 outlook sours as market fills, volatility underplays risks

Chart created on Tradingview platform

The market conditions table

If you only operate on a technical basis, I can understand where a sense of engaged reversal emerges. The S&P; 500 chart looks like a remarkable turning point before the benchmark marks an official “bear market” designation. In addition, there were other risk-sensitive measures that were willing to confirm the change in belief. Global indices have risen along with emerging markets, junk bonds and carry have truly embraced this momentum. Still, there are good reasons to suspect a “bear market bounce” versus a full-fledged bullish turn for all of these. Ultimately, the biggest disruptor for me is the state of expected disruption in volatility metrics. The VIX volatility index fell, but the “volatility of volatility” measure VVIX dropped its warning signal to levels not seen since January 2020 – before the pandemic. The risk may have eased from the previous month’s surges, but we are hardly in a position where markets should see little to no risk of a change in direction and pace in the near future. In fact, the situation is quite the opposite of this outlook, which depicts a market ill-prepared for an upheaval.

VVIX ‘Volatility of Volatility’ Index Chart (Weekly)

S&P 500 outlook sours as market fills, volatility underplays risks

Chart created on Tradingview Platform

What would cause these markets to lose their artificial sense of stability? The main fundamental sparks remain the same going forward as what has baffled traders over the past few weeks and months. Inflation is a constant pressure that has only recently signaled its lingering problems. Last session’s ISM manufacturing survey showed continued pressure across its price component as house prices soared the previous day. I am a proponent of tracking commodity prices on the open market via energy markets. Inflation is more of a risk due to its pressure on monetary policy trends that cause most major banks to take over the system – in some cases very quickly. This in turn undermines a complacent supply that tends to act against the fundamental backdrop, but the downgrade in growth forecasts really highlights the contrast.

Calendar of major world economic events

Calendar created by John Kicklighter

The best themes are back in the game

Which is worse for speculative appetite going forward: the removal of speculative support by major monetary policy groups or the slowdown or weight of rapidly rising inflationary pressures? This is the source of a good debate, but ultimately, we are faced with a context that sees the convergence of the two pressures. I see the growth front as the least transparent theme right now and therefore the biggest unpriced risk. In the past session, the ISM manufacturing survey offered a slight uptick with dubious conviction, Chinese factory activity remained in contraction through May and Australia’s first-quarter GDP reading better than forecast was still a shadow compared to that of the previous quarter. Ahead, I’ll mark numbers like Brazil’s GDP release; but I’m much more aware of the momentum that can create serious criticism for a developed leader like the US Factory Orders, NFPs, and ISM service business.

Chart of the S&P; 500 overlaid on US services and manufacturing activity from the ISM (monthly)

S&P 500 outlook sours as market fills, volatility underplays risks

Chart Created by John Kicklighter with data from ISM

While growth forecasts are the most misjudged aspect of the fundamental backdrop, there is no doubt the constant pressure represented by the slow withdrawal of monetary policy support. During the last session, the Bank of Canada announced its rate hike of 50 basis points to 1.50%. It was as expected, but the tone still managed to keep the warmongering perspective intact. Looking ahead, I’m fascinated by the interpretation of Fed policy anticipation as we shift the official two-week calendar to the next FOMC and ahead of the official media blackout on Saturday, June 4. .e. Expect Fed officials to do some final piloting of expectations going forward, and there are some serious hawks on tap.

Chart of the monetary policy position of the main central banks

S&P 500 outlook sours as market fills, volatility underplays risks

Chart created by John Kicklighter

As we navigate sentiment and event risk, there are many places to look for progress, per my particular interest in USDJPY is unwavering. This pair is a great litmus test for what’s most important: risk appetite; bear interest or relative growth potential. So far, we’re still seeing a big improvement in performance; but I believe that risk aversion could easily drown out the well-priced picture of carry differentials in these markets. That said, keep an eye on this barometer to provide some perspective.

USDJPY chart with 50-day SMA and 2-day rate of change (daily)

S&P 500 outlook sours as market fills, volatility underplays risks

Chart created on Tradingview Platform

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