US STOCKS OUTLOOK:
- U.S. stocks rebound strongly Tuesday as the sharp drop in oil prices eases inflation fears
- Nasdaq 100 rallies more than 3% after bouncing off key technical support in the 13,000 area
- The FOMC monetary policy decision will be on the market’s radar on Wednesday. A hawkish outcome may prevent follow-through on topside
U.S. stocks soared on Tuesday, as dip buyers stepped in to stem the bleeding in the equities space and to pick up battered sharesfollowing the recent sell-off on Wall Street. The rally was also supported by a sharp decline in oil prices, with WTI and Brent falling more than 6%below $100 per barrel for the first time since March 1, an event that could help ease rising inflationary pressures in the world’s largest economy.
At the close, the S&P 500 surged 2.14% to 4,262, erasing all of the previous session’s losses and ending a three-day losing streak, but was unable to reverse the death cross pattern that flared up on its daily chart earlier week. The Dow Jones also rose, up 1.82% to 33,544, boosted by big gains in Home Depot and Microsoft shares. Meanwhile, the Nasdaq 100 was the star of the show, rallying 3.16% to 13,458, after bouncing off the critical support in the 13,000 area, amid strong appetite for technology stocks.
Though sentiment appears to be on the mend, one-day’s performance does not constitute a trend.This means Tuesday’s violent rally in risk assets could be another dead cat bounce typical of bear markets.
With the crisis in Eastern Europe unresolved, the backdrop has not changed. In this regard, Russian President Vladimir Putin today accused the Ukrainian government of not being serious about finding a mutually acceptable solution, a sign that negotiations to reach a ceasefire are not going well. There is no need to say that the longer the war drags on, the greater the negative impact on global growth and inflation, especially if trade flows are further disrupted or other countries are drawn into the military conflict.
Turning our attention to other price action catalysts, the FOMC’s monetary policy announcement will take the limelight on Wednesday. There is widespread consensus that the central bank will begin its rate liftoff at this meeting, raising borrowing costs by 25 basis points to 0.25%-0.50% in an effort to pursue the goal of price stability. As the move has been thoroughly telegraphed, traders will focus on the bank’s forward guidance and new macroeconomic projections: this is where the risks to equities lie.
Given that the inflation profile has deteriorated significantly in 2022, policymakers could come out swinging and endorse a steep path of rate increases. For reference, CPI hit a four-decade high of 7.9% year-on-year in February, is not expected to peak until the second quarter or even later due to the recent commodity market price shock, and is breaking out in just about every major category of goods and services. As a result, inflation expectations are quickly rising and beginning to become unanchored, with the 5-year and 10-year breakeven rate at 3.50% and 2.94% respectively, the highest levels on record.
Back in December, the Fed’s median dot-plot signaled three hikes for 2022, but updated forecasts to be released tomorrow couldshow six or even seven adjustments despite heightened geopolitical risks. An aggressive tightening cycle may spook investors, spark a sell-off on Wall Street and hurt stocks, particularly those that rely on very low rates to justify their lofty valuations (tech and growth with long duration cashflows will be the most sensitive). That said, of the three major equity indices, the Nasdaq 100 is the most vulnerable to hawkish repricing of monetary policy expectations.
S&P 500 TECHNICAL ANALYSIS
Despite Tuesday’s rebound, the S&P 500 bias is bearish, at least from a technical perspective. First off, the death-cross that developed on the daily chart this week presages further weakness. Second, the presence of lower highs and lower lows is uninviting and does not encourage risk-taking behavior. In any case, we would need to see how price action reacts to the FOMC meeting to better assess the near-term outlook. On that note, if the index reverses lower and resumes its decline, support is seen at 4,155 and then 4,115, the 2022 low, but if both floors are invalidated, a retest of the May 2021 low near 4,055 would be in the cards.
On the other hand, if the S&P 500 manages to extend its recovery in the coming sessions, resistance is seen at 4,295 and then 4,385, the 38.2% Fibonacci retracement of the 2022 decline.
NASDAQ 100 TECHNICAL ANALYSIS
The Nasdaq 100 soared more than 3% on Tuesday, but remains near bear market, defined by a 20% or larger pullback from a recent high. While the short-term outlook remains negative, it was an encouraging sign that price respected the 13,000 area, failed to push lower, and bounced off from those levels. It is too soon to say a bottom is in place, but if we see follow-through to the topside in the coming days, technical resistance appears at 13,735, followed by 14,050.
On the flip side, if traders sell the rip as it has been a common practice in recent days and bears pounce, the most important support zone to watch is 13,000. If this floor is breached, all bets are off. Under this scenario, we could quickly see a move towards 12,618 and then 12,225.
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—Written by Diego Colman, Contributor