August 8, 2022
Witchcraft: Technical resistance for the S&P 500 (SPX) remains in the 4150-4200 range. The SPX has now rallied +13% off the June 16 low of 3667. In the days leading up to the June 16 low, we explained the increased likelihood for a mid-teens reflex rally given deeply oversold conditions. We were also encouraged to see daily momentum divergence that typically precedes reversals. That period also included weekly momentum divergences, which are far less common and preceded the end of the 2009 bear market and major bullish inflection points in 2011, 2015 and 2020. Unfortunately, a near-term break above ~4200 likely requires a change in macro fundamentals. In this case, the required change is a Fed pivot, which likely requires lower than expected realized inflation. A Fed pivot would first show up in lower terminal rate expectations implied by December OIS forward pricing. Friday’s stronger than expected Jobs Report took terminal Fed expectations to ~3.67%. Today’s NY Fed survey dropped it to ~3.55%. For the SPX to sustained levels above ~4200, we expect the terminal Fed rate would need to fall below 3%, which likely requires more than one realized inflation miss.
CPI preview: Consensus expectations for headline CPI sit at ~8.7% YoY. Levels between 8.7% and 9% followed by hawkish Fed messaging over the subsequent 48 hour period could take the SPX to support levels near 3810-3950, while a headline print above 9% would likely lead to elevated bond market volatility with the SPX finding support near ~3790. Consensus expectations for core (ex food and fuel) CPI sit at +6.1%, up from 5.9% in June and we apply similar SPX support levels for 6.1%-6.4% and above 6.5%.