Inside Markets — Technical Support

Today’s risk-off tone started with falling commodity prices in response to disappointing China manufacturing PMI. WTI crude and gasoline prices fall faster on reports claiming that OPEC+ will proceed with a production increase in October.  The lower commodity prices and well-understood September seasonal weakness form a bearish short-term narrative as the S&P 500 (SPX) sits below technical resistance at the all-time high of 5667.

We haven’t been expecting a new all-time high in the SPX, but recognize the potential for one to occur given a bullish short-term pain trade dynamic based on illiquidity, open buyback window and likely re-grossing of vol-targeting strategies. The window for the bullish pain trade should close when the buyback window begins to close on September 13. Today’s pullback is meaningful but the bullish SPX trend remains intact at levels above ~5455.  A sustained break below ~5455 would reverse the short-term bullish trend with ~5325 as first level support.

The macro backdrop for US equities remains bullish as long as growth remains resilient and the Fed stays on a path to ease policy.  Last week’s data mostly supported the bullish view after an upwardly revised Q2 GDP print was followed by an inline July core PCE number and improved consumer confidence report that included the lower year-ahead inflation expectations (lowest level since November ’20).  Note the improvement in consumer confidence and lower inflation expectations are partially due to lower WTI crude (~10% below April highs) and gasoline prices (~21% below April highs).  Last week’s data set led to cyclical stocks outperforming, while Tech sold off.  Labor markets are in focus this week with Friday’s Jobs Report likely informing market expectations for the pace of Fed rate cuts.  While the macro backdrop has been bullish for equities it’s important to recognize its fragility especially on weaker labor market data.