S&P 500 Friday‘s session reversed the upswing so much that it calls into question the Q4 rally as having started already. Given Friday‘s slide through both 3,640s and 3,625, Thursday‘s intraday reversal must be chalked down to pre-CPI positioning, short squeeze, and options activity.

It would be insightful to recap the last two days so as to view them in conjunction, so let‘s start with Thursday:

(…) strongly rallied after a precipitous drop to 3,500s on CPI data coming in predictably above expectations. I looked for high inflation data, and especially high core CPI data and these played into the hawkish Fed expectations, further strengthening them as the short end of the curve reveals.

The selling pressure though stalled, and the modest rebound that could have rolled over in the 3,560s as I indicated was a good place for it to happen, didn‘t materialize. The sellers were swiftly overpowered, and an hour later I declared that attempt as failed, with buyers moving in quickly. Two hours after that, I talked bullish bias into the closing bell, aftermarket, and premarket. S&P 500 has made good progress since, reaching 70+ points higher after the original bullish call.

The ease with which supports Friday had been broken through, that HYG wasn‘t able to defend high ground better, and that the long end of the curve hasn‘t yet stabilized, speaks for more downside this week – before the rebound off even more oversold levels happens.

The question is how deep we then have to go still.

My opinion is less than 5% from Friday‘s close, but probably somewhat below, meaning that 3,500s would be broken after all.

I‘m not raising the S&P 500 earnings per share, and the picture valuations and earnings downgrades ahead paint. The consumer is still doing relatively fine, the real economy hasn‘t dipped into a serious recession, and there are still some bright spots in earnings ahead – the tech midcaps seem to be improving, financials didn‘t have a poor week – but above all, healthcare isn‘t looking bad at all. Energy stocks are still on fire and will be even more. It would be the defensives (utilities and consumer staples) together with communications, that would be lagging ahead.

As Thursday‘s technical posture disappointed in bringing about more than a fleeting turnaround, what could prove to be such a catalyst fundamentally? Fed pivot or pause? Not near in the least. Job market data leading to speculation of a Fed pause? The wordy language that gives a dint of pivot hope without actually uttering any (Brainard or even Yellen‘s question to the financial sector)? Possibly, but not enough. Focus on slowing the real economy as opposed to inflation? Yes, this is a very likely, favorite pick of mine.

Precious metals and commodities are in the process of turning, and out of them all, I am of course still most bullish on oil, followed by silver (due to outperform in the not-too-distant future) and copper. As Friday‘s performance including in cryptos shows though, the path ahead isn‘t all clear (just look at gold and miners approaching Sep lows – nominal and real rates are biting), and the dollar I have called as not to have topped, clearly hasn‘t topped – and will continue placing pressure on real assets as well.

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S&P 500 and Nasdaq Outlook

S&P 500 looks set to revisit Thursday‘s lows, and more – no matter the quite fine earnings last week from PEP or more than a couple of financials. While soft landing is out of the window, hard landing isn‘t here yet, and market breadth readings are quite extreme.
 

Credit Markets

Even though HYG may easily attack Friday‘s open, it isn‘t likely out of the woods yet. Unless quality debt instruments stabilize, stock market rallies are suspect. The upcoming Q4 one would be accompanied by a decent retreat in yields, which would mirror the shift in focus from inflation to a recession that I called above the most likely turnaround catalyst.

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