S&P 500, DAX 40 weekly outlook: Bulls run out of steam to break higher
13:36, 22 November 2022
It seems like markets are at an impasse. With so much data coming out in the first weeks of November, the current playing field shows investors are slightly confused about how to best position themselves.
On the one hand, the latest data in the US shows that the economy and inflation may be cooling, but prices are still elevated and the labour market remains tight. This is how Federal Reserve members are justifying the need for further tightening, given that, despite showing a slowdown in October, inflation is still well above the bank’s 2% target. The same can be said for the jobs market because despite creeping up in the last month, the unemployment rate still remains below the average of the last few years before covid at 3.7%.
It won’t be until December 14th that we get the next Fed rate decision but markets are unlikely to remain in this state of limbo until then. There is - of data to focus on from now until then, including the core pie price index on December 1st, the November NFP data on December 2nd, and the November PPI data on December 9th.
But for now, this week will be a shortened week due to the Thanksgiving holiday in the US, meaning we may see some increased volatility given the reduced liquidity. The latest Fed speakers have shown some division regarding how high the terminal rate should be, but the general feeling is that more tightening is likely to come in the new year. In fact, a continuation of restrictive policies, albeit at a reduced capacity, will likely be enough to keep the dollar supported and risk sentiment subdued. We will have Jerome Powell speaking about the economic outlook and the labour market on November 30th, something traders will be watching closely for any guidance.
Aside from the US, there are ongoing concerns about a resurgence in Covid cases in China, which will likely extend the zero-covid regime and put further pressure on global demand. This has helped put a stop to the risk-on rally we’ve seen over the past two weeks, allowing the US dollar to undo some of its recent losses and equities struggling to keep the bullish momentum going.
S&P 500 | Lower highs point towards further weakness
The release of the US PPI last Tuesday the 15th market the top for the bullish rally in the S&P 500 (US 500). The data was positive for risk-on sentiment, showing a drop in October and coming in below expectations, but the rally had already started to look over-extended after the impressive 5.8% jump the Thursday prior.
In reality, the selloff just doesn’t seem to be over in my opinion. I think we still have some weakness ahead, and I stick to my prior views that buyers got a little too carried away during the recent rally. The daily S&P 500 chart is showing a clear pattern of lower highs since the peak last Tuesday and the fact that it was unable to come into contact with its 200-day simple moving average suggests that we have a corrective move ahead.
That said, the retracement isn’t going to be easy for sellers. There is still a good amount of support from traders who believe the Federal Reserve is done being hawkish and that monetary conditions are going to ease from hereon out. That’s why the upcoming data is going to be so important for positioning, and we’re likely to see some volatility around these releases.
But due to the lack of data out this week, we could see the S&P 500 continue to trend sideways within a slightly bearish channel, but I wouldn’t expect to see a clear direction over the coming days. We could potentially see a pick up in volatility towards the end of the week due to the lack of liquidity on the back of the US thanksgiving holiday, but that will most likely only happen if we see some unexpected headlines or data come out during that time.
Looking at the percentage of stocks within the S&P 500 that are above their 20-day moving average we can see that the number has dropped to 82% from the highs seen 10 days ago at 89%. It seems like when we’ve hit, or come close to, the 90% threshold in the past, the S&P 500 has corrected lower in the following month, suggesting that the 2022 bear market may not yet be over.
What is your sentiment on US500?
S&P 500 daily chart
DAX 40 | 14,500 unlikely to give way easily
Unlike the S&P 500, the DAX 40 (DE 40) has managed to continue pushing higher over the past week. The German index jumped almost 5% on November 10th which allowed it to enter a bull market as it rose over 20% since its September lows. It has also managed to break above its 200-day SMA and the 20-day SMA has come out on top of the other three (50, 100, 200) meaning the short-term bullish rally remains in consolidation.
But as with the overall market sentiment, the buyers in the DAX 40 are starting to show exhaustion. As expected, the 14,500 area has shown some tough resistance so I struggle to find motives for buyers to come in at this level. There is also further resistance in close proximity (14,813 - 15,000) meaning an extension of the bullish run could be short-lived.
Because of this, consolidation with a bearish tilt seems like the most plausible scenario. In fact, the daily candlesticks are evidencing the resistance present at current levels with shortened or non-existent bodies and the RSI remains in overbought territory, so I would expect the index to retrace back towards 13,900 for buyers to find a more appealing entry level.