Quick update for the US stock market ( as of 27th Oct US market closing )
It’s been a confusing time for investors and traders alike, the chopping price swing and bad news release one after another are really messing up everyone mind.
In times like this, we have to look at the price chart, draw a few lines to make sense of the trend, potential price inflection/continuation & acceleration point/zone. ( the above comical take on the market has a few grain of truth in it though )
Since the event risk has been high and will be high going forward, we need to look at them and consider their implications ( this is not news trading by the way ), it’s called connecting the dots, and admittedly it is tough to do. But since when is financial market easy ?
This article entry will be split in the following sections
1) S&P 500 price chart
2) S&P 500, 10-year yield , 2 year yield
3) Event happened in the past 1-2 weeks ( connecting the dots )
4) Upcoming event risk
Now let us examine each sections further,
1) S&P 500 price chart
Looking at the price swing, surprisingly the price is contained within Broadening triangle, aka Megaphone pattern. Frankly speaking, This is quite hard to believe given that 10 year yield has gone from 3.5 to as high 4.25, and October 13 CPI release has been bad. If you had ask anyone what would be the S&P 500 level if 10 year yield went from 3.5 to 4.25, most professionals would say S&P 500 will be between 2900-3400. But instead, the low was 3490-3500, market only grind lower but did not plunge below 3400, so all in all very surprising indeed.
As of 27th October US market closing time, S&P 500 turn down from 50 days MA, if it declines further from here, would the 20 days MA ( around 3700 ) hold the decline, and potentially bounce off it ? Alternatively if 20 days MA fail to hold the decline , the next important levels to watch going forward, previous swing low on hourly timeframe 3650, 3500 level and the lower boundaries in megaphone pattern.
2)10-year yield and 2 year yield
10-year yield & 2-year yield has been the chart that market paid the most attention to ( besides CPI release )
At present 10Y yield is below 4% as of October 27th US market closing time, and is at an inflection point, will it bounce of the trendline and goes up higher or will it breakdown? for the market rally to gain any traction, 10 year yield must reverse & breakdown the trendline from the trendline, preferably break below 3.75-3.85 and never return higher.
3) Events happened in past 1-2 weeks ( connecting the dots )
There are several Important event happening in the past 1 – 2 weeks ( Actually there are more than 3 important event happened in the past 2 weeks, but I will cover 3 of them in this entry, and will likely share more of them on my next entry )
Event 1: WSJ fed news on Fed contention of raising rates
There was some shift in Fed tone of communication on their future rate hike policy, it was subtle (or loud shift depending on your threshold/sensitivity )
https://thehill.com/opinion/finance/3691022-will-financial-stability-concerns-derail-the-feds-inflation-fight/
**On 30th September, Fed vice chair Lael Brainard speech touches on impact on US rate hike policy and the financial spillover concern ( draining liquidity from all foreign countries and entities ) , impacting every global financial participants through FX and Bond market channel. Brainard gave this speech because there was a near-collapse in UK financial market earlier ( Thanks to ex-PM Truss tax cut budget ). But it seems that financial market didn’t take note and US10Y yield rip higher anyway from 3.6 to 4.25, maybe because there are some institutional player busy selling most liquid instrument - USD 10Y Bond to meet their margin call ? ( especially UK pension funds ) .
if US Treasury yield keep spiking higher, Fed could have a bigger potential problem than just high inflation, financial stability concern would be their next crisis. Therefore on 21st Oct , 9am Eastern time WSJ journalist Nick Timiraos released a article titled : “Fed set to raise rates by 0.75 Point and debate size of future rate hikes : 10Y Yield back down from 4.25 immediately. Subsequently, Fed governor Mary Daly and James Bullard immediately changed their tone, talking about overtightening and being cautious in next year rate hike.
Event 2: Big tech negative earnings
Big tech earnings had been poorly received even though some of them beat/inline with estimates, but stock drops immediately post-earning because of various other reason. Going forward will market shrug off the earnings disappointments and rally or will it consolidate/ drop further ? the coming 2 weeks movement will reveal how market digest the earning dismay.
Below is the one-day price movement in reaction to earnings reports of the Mega-caps
Tesla : -8.6% ( revenue miss , and various other challenges )
Microsoft : -7.7% ( weaker forward guidance even though earnings & revenue come in as estimates )
Google : -9.1% ( advertising revenue miss estimates )
Meta : -24.6% ( earnings and revenue miss estimates )
AMZN : -13.8% ( after hours, AWS miss estimates )
AAPL : -1.0% (after hours, and Iphone revenue miss estimates )
Event 3: 10 year – 3 months inversion
10Y-3M yield curve Source : Bloomberg
The 10 year – 3 month yield has finally inverted. According to the New York Fed, the relationship between the three-month and 10-year yields have the most predictive power for U.S. recessions; has preceded every U.S. recession since 1950 (with only one "false" signal: the credit crunch and slowdown in 1967). 10Y – 3M yield difference is a much better recession signal than the 10years-2years yield difference ( more false signal with 10Y-2Y yield curve inversion )
Is there any systematic between recession and bear market , the short answer is No. I May published an article to talk more in-depth about this. In short there really is no systematic relationship between Economic data, Recession/recovery/economic growth vs Bull/bear market.
As the following charts show, there is zero relationship whatsoever with start/end of bull/bear market with start/end of actual recession , start/end of NBER recession declaration.
<recession vs bull/bear market timing>
4) Upcoming event risk
There are Fed meeting on 2nd November, this is an important one, because 75 basis point hike has been fully price in, they will be queried and grilled by journalist on Future rate hike from 14th Dec onwards, will it be 50 or 75 basis point on 14th Dec meeting and how about January 2023 meeting ?
In summary, the next 3 most important event risk, 2nd Nov meeting, November CPI release are closely watched and will determine the next path forward in S&P 500.
**( correction on earlier wrongly stated date 17th October)
Disclaimer : The information presented here are for research and education purpose only, and does not constitute investment advice, trading recommendation, author shall not liable for any action taken by any individual/company with regards to the information presented here or any part of the website - https://marketcycleedge.substack.com/