S&P 500’s downtrend momentum set to continue

Teo Paul Simon

THE S&P 500 Index (SPX) is down about 16.5 per cent year-to-date, closing at 3,979.87 on Sep 7, 2022. This year has been a challenging year for most investors as H1 saw the index decline by roughly 20.6 per cent, entering into bear market territory. The index then regained roughly 17.04 per cent from Jun 17 to Aug 16, primarily driven by a relief rally stemming from premature market expectations of an early dovish Fed pivot.

However, the SPX has declined by around 7.56 per cent since Aug 16, as markets sold off following hawkish Fed chorus at the Jackson Hole Symposium held from Aug 25 to Aug 27. Fed chair Jerome Powell reaffirmed the Fed’s intention to continue hiking rates even at the cost of “some pain”. This toned down expectations for an early Fed pivot, as its game plan appears to be “hike and hold” until inflation is brought down to the 2 per cent target.

We lean towards a 75bps hike in September as we abide by the mantra of “Don’t fight the Fed”. I expect markets to remain volatile until the release of CPI data on Sep 13 and the Fed’s interest rate decision on Sep 21, which should serve as key market drivers. Any signs of inflation moderating more than expected should be taken as a bullish signal for markets as it increases the likelihood of the Fed easing on its hawkish rhetoric.

On a technical perspective, we maintain a bearish outlook on the SPX as it looks to be on the downtrend, having fallen by 8.88 per cent since mid-August. In the near term, I believe that the SPX will test the key support level of 3,900 (S1), and if broken, will continue to decline towards the support level of 3,740 (S2) for the rest of the year due to 3 main reasons:

The Relative Strength Index 14 days (RSI14), a momentum indicator, is currently below 50, at 42.4244, signalling bearish momentum in the index. Prices are also currently below the 50 EMA, pointing to a weak momentum.

We also see a bearish crossover signal on the Moving Average Convergence Divergence (MACD) as the MACD line crossed below the signal line while the MACD histogram is below zero, signalling bearish momentum.

The On Balance Volume (OBV) indicator shows both the index and the OBV making lower peaks and lower highs. This confirms the downtrend and signals that the downward momentum is likely to continue.

Ultimately, I expect the S&P 500 index to remain under pressure in the short term and test the immediate support line of 3,900 (S1) at least until the release of CPI data on Sep 13. Here, depending on whether there is concrete evidence of inflation moderation and the Fed’s interest rate decision on Sep 21, we could see a break below 3,900. The index may then head towards 3,740 for the remainder of the year if inflation persists or the Fed stands firm with its aggressive rate hikes, increasing the possibility that the economy will tip into a recession. If the support level of 3,740 (S2) is broken, we could see the index test the previous low of 3,640 back in June. In the alternative scenario that the Fed eases on its pace of rate hikes, we could see the SPX trading range-bound between 3,900 and 4,180 (R1).

The writer is strategist at Phillip Nova