Near Term SPX
August 18, 2022
Increased short covering gets most of the credit for the ~18% S&P 500 (SPX) rally off the mid-June low as stocks with the highest short interest squeezed higher. A sharply lower prices paid/received component in the July NY Fed survey was the catalyst to accelerate the rally in July with the lower July CPI print taking the SPX through pattern resistance at ~4200. Yesterday’s risk-off tone followed the S&P 500 failing to break through the 200-day moving average at ~4330. After weeks of good news, yesterdays UK CPI print may have reminded investors that inflation is still a concern. The 200-day moving average is only significant in the near-term as a popular CTA trigger and we’d expect momentum to accelerate on a sustained breakout. Over the last four weeks, short-covering by volume was a ~3 standard deviation event, so this tailwind should begin to fade. However, light attendance and low volumes during the last two weeks in August often results in trend continuation. And given the set up, equity risk may still be skewed to the upside into month-end. The fundamental metrics usually associated with bull markets are not currently present, but upside equity momentum tends to precede improved fundamentals. We stay open to more upside at SPX levels above 4080-4120.