US Equities Update: S&P 500, Nasdaq Attempt to Halt Declines after CPI

S&P 500, NASDAQ ANALYSIS

  • US inflation data sends risk assets tumbling
  • S&P 500, Nasdaq key technical levels as equity markets attempt to halt declines

US INFLATION DATA SENDS RISK ASSETS TUMBLING

It is surprising just how sensitive markets have become to high importance data prints, with none seemingly more important than inflation (CPI) data right now. Of course, it is expected that high importance data is likely to cause a fair amount of volatility in the moments leading up to and after the release of said data.

The massive sell-off in US equities and risk assets in general appears to have quelled the optimism that was priced in, reflecting a view that inflation was going to decline in August. That is a typical market response to a miss in important data when participants were clearly on the wrong side of the actual print. The more surprising element of all of this was the increasing expectation or perhaps the pure optimism, that inflation was due to cool significantly enough to warrant a discussion on Fed rate hike policy.

The Fed has been clear that prints of cooler inflation are not enough to warrant a change in course and that “compelling evidence” of declining inflation is what the committee is interested in before even consider a slow-down in the current hiking cycle.

PRICE ACTION IN THE AFTERMATH OF THE POST-CPI REPRICING

The S&P 500 E-mini futures sold off a massive 5.5% yesterday alone, with price action this morning attempting to hold the line above 3950 – a zone of support. The 3950 level and the 23.6% Fibonacci retracement of the 2022 major move at 3915 remain key to a bearish continuation with the 3860 level one to watch as prices failed to test this level earlier this month.

If we are to hold 3950, the next level of resistance appears at 4030 followed by yesterday’s high around 4130. However, as we continue the Fed’s blackout period, it is likely that interest rate expectations will continue to climb, supporting the dollar and weighing down equities, as markets currently price in a 75 basis point hike with around 75% probability and around 30% chance of a 100 bps hike.

S&P 500 E-Mini Futures Daily Chart

The chart below has been zoomed out to reveal the longer-term downtrend which remains well intact. The recent advance was not enough to even test the descending trendline and therefore the market outlook of ‘selling into strength’ remains constructive.

S&P 500 E-Mini Futures Daily Chart – Zoomed out

Source: TradingView, prepared by Richard Snow

IG CLIENT SENTIMENT: LONGS AND SHORTS NEAR 50/50, OUTLOOK UNCERTAIN

US 500Retail trader data shows 48.13% of traders are net-long with the ratio of traders short to long at 1.08 to 1.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests US 500 prices may continue to rise.

The number of traders net-long is 16.08% higher than yesterday and 8.13% lower from last week, while the number of traders net-short is 12.84% lower than yesterday and 6.04% higher from last week.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed US 500 trading outlook.

NASDAQ PRESENTS CLEAN SELL-OFF FROM PRIOR TRENDLINE SUPPORT

The Nasdaq presents a similar case to the S&P 500 as we would expect, but technically, produces a clean rejection of the prior ascending trendline which connected prior higher lows.

The index trades below 12,259 with support at prior lows of 11,921.50 followed by 11,540. Resistance sists at 12,250 followed by the 12,950 level.

Nasdaq E-Mini Futures (NQ1!) Daily Chart

Source: TradingView, prepared by Richard Snow