S&P 500 Marks Another Underwhelming Bullish Break – What Does It Mean?

S&P 500, MSFT, GDP, Recession and DXY Talking Points:

• The Market Perspective: S&P 500 Eminis Bearish Below 3,900; USDJPY Bullish Above 127.00
• The two-day charge for risk-leaning assets earned the S&P 500 a clear break through its 200-day SMA, trendline resistance and overlapping Fibs; but where is the follow through?
• Our growth interests given an update this past session with the January PMIs; but the market seems to be looking for something more weighty for conviction

Technical achievements alone are not enough to prompt the market to action. For charts traders – myself included – this has led to significant frustration in assessing market moves over these past months. The most recent break would come from the S&P 500 to start this week. The benchmark US index Monday picked up where Friday’s rally ended with a 1.2 percent rally that pushed the two-day performance to its biggest back-to-back charge since November 11th. More important than the tempo was the perceived shift in position for the market. The market charged beyond the 200-day simple moving average (SMA) from the gap on the open. The restraint that overhead had on the market was already eroding however given the frequent, unsuccessful breaches of this popular measure over the past two months. Yet, the further push to five week highs, a more definitive break of the trendline resistance stretching back to January 2022 and the push above a confluence of high profile Fibonacci levels around the 4,000 level all added to the narrative of progress. That said, there was no follow through after the ‘break’. This past session the S&P 500 actually slipped 0.1 percent on lower volume. Some may be comfortable with a series of high plateaus slowly chopping ahead; but on a weak fundamental backdrop, a lack of traction could quickly turn into a liability for the bulls.

Chart of S&P 500 with 200-day SMA, Volume and 1-Day Historical Range (Daily)

Chart Created on Tradingview Platform

What seems to be lacking for a market that can spin a technical break into a fundamental run is the lack of a tangible backing for any real bullish climb. The state of ‘sentiment’ in the market is such that we go through periods where good news is treated as if it is problematic and vice versa (such as when strong economic data is read as reason for a central bank to keep tightening) while priorities shift whether through mere awareness or fad. There was a chance to spin a favorable backdrop out of the data this past session. Among a range of data and events Tuesday, the clearest signal would come through the January PMIs from developed world economies. The mix presented was a notable improvement – with the exception of the UK’s reading. Japan continued to outperformance with an expansionary reading, the Eurozone flipped back into positive territory (above 50) while the US and Australia pulled up from their previous pace of contraction. That could have been read as favorable, but the market didn’t seem to bite. It begs the question: was the data just not clear enough or has the market spent its good will interpretation of data?

Chart of Monthly PMIs for Major Developed Economies from Standard & Poor’s Global (Monthly)

Chart Created by John Kicklighter with Data from Standard & Poor’s Global

I believe that the prospect of economic contraction for the US, numerous developed economies and a portion of the global economy is not priced in. Sure, there have been a number of indicators to suggest such a hardship is ahead – from consecutive quarters of negative GDP prints from the US, months of the US 2-10 spread inversion and countless sentiment surveys. Yet markets have grown accustomed to discounting the threats of the ambiguous future following years of excessive central banks stimulus that previously offset or prevented the bad outcome. However, those same backstops are no longer in place. The Fed and other major central banks seem to be making that abundantly clear, though many market participants don’t believe they will not show up when called upon. Over the weekend, my poll on whether participants believed the US will fall into a recession in 2023 or not ended with a very clear skew in favor of ‘yes’. Was that already priced in through the October low?

Poll Asking Traders About the Probability of a US Recession in 2023

Poll from Twitter.com, @JohnKicklighter

If the markets are indeed awaiting a strong and clear signal on the health of the economy, anticipation for the Thursday US GDP release is a headline-worthy event that will draw our attention forward. That said, its effectiveness for moving the market is far less consistent than its ability to generate recognition. If anything, next week’s update for the World Economic Outlook (WEO) from the IMF or even the Federal Reserve’s monetary policy decision will more effectively leverage the perspective of growth and its market implications. However, that statistical history won’t necessarily negate the dampening effect of anticipation heading into the release. Looking for other outlets of conviction, there isn’t much that levels up to global impact. Monetary policy will regain some traction, but not necessarily on a systemic basis. The top listing for the macroeconomic docket today is the Bank of Canada rate decision. This group is among the most hawkish of the major players, but its planned deceleration from the aggressive pace of 2022 (including a 100bp move) is already well known. In fact, swaps show the market pricing in more than 50 basis points of easing in the second half of 2023. So, whether or not the BOC hikes 25bps at this particular meeting or not will probably generate less heat in the markets than unofficial projections of what comes later in the year.

Top Global Macro Economic Event Risk for the Next 48 Hours

Calendar Created by John Kicklighter

Meanwhile, no global macro analyst/trader worth their salt can go without an assessment of the Greenback’s standings given its central point in global economic assessment, the lead its own monetary policy takes amongst its peers and the safe haven role it plays in more turbulent markets. Notably, the DXY Dollar Index has been virtually unchanged the past two days. In fact, the index has registered virtually no open to close change in the span of the last 8 trading days. The absolute range over that period (as a percentage of spot) is the smallest span over a similar period in 11 months when we exclude the year end, holiday trading period. That is surprising given the advance in risk assets, but perhaps the rebound in 2-year yields (as a proxy for rate expectations) is offsetting the bearish winds. However this currency resolves may go a long way in informing the broader markets as to what theme is dominating the market’s focus.

Chart of DXY Dollar Index with 100 and 200-Day SMAs (Weekly)

Chart Created on Tradingview Platform