U.S. stocks plunged at the cash open on Thursday but managed to retrace most of the losses in late trading, finishing the day largely unchanged, in a session characterized by wild swings and high volatility amid growing recession fears. When it was all said and done, the S&P 500 fell modestly 0.3% to 3,790, with growth-linked sectors, including energy, financials and materials, underperforming. The Nasdaq 100, for its part, advanced 0.34 % to 11,768, erasing a 2% drop, as interest-rate expectations shifted after various Fed officials failed to fully endorse a 100 basis points interest rate increase for the July FOMC meeting.

Despite bond market repricing, sentiment was fragile. Corporate earnings and forward-looking guidance, from major commercial and investment banks with a front-row view of the economy and broad insight into consumer’s balance sheets, disappointed expectations, raising concerns about the state of the recovery. JPMorgan Chase, the largest financial institution in the U.S., for instance, struck a cautious note on the outlook, building capital reserves against default and temporarily suspending its share buyback program as precautionary measures in the face of heightened uncertainty.

Traders will have more information about the current state of affairs in the coming days once Well Fargo (WFC), Citigroup (C) and Bank of America (BAC) release their results, but with key players in the space bracing for potential loan losses, there is not much room for optimism at this point. Against this backdrop, cyclical stocks, wedded to the strength of the economy, could continue to slide in the short term, as investors abandon growth-linked stocks to build defensive positions. In general, health care, staples and utilities equities are viewed as safer investments during recessionary environments.

Looking ahead, economic prospects, along with the Fed’s tightening cycle, will set the tone for Wall Street in the coming days. On the monetary policy front, investors were spooked yesterday after the June inflation surprised to the upside, surging to 9.1% y-o-y, its highest level since November 1981. The disastrous CPI report prompted bets of a 100 bp rate hike at the next FOMC meeting, but several policymakers, including Christopher Waller, pushed back against this idea today, throwing a lifeline to the market. This allowed the S&P 500 and Nasdaq 100 to mount a remarkable turnaround.

To better navigate the challenging investment landscape and extreme volatility, traders should remain laser-focused on the ongoing earnings season, while keeping tabs on the economic calendar. On that note, June retail sales figures will be released on Friday morning. The data, which can be a rough proxy for goods spending, may offer clues about the U.S. consumer and demand conditions in a context of falling real income. While a weak report can send bad signals about household consumption, it may lead traders to discount a less aggressive hiking path. Rate-sensitive and beaten-down technology and growth stocks could benefit from this scenario.

S&P 500 TECHNICAL ANALYSIS

The S&P 500 broke below a technical floor near 3,820 earlier this week, slipping back into bear-market territory. With sentiment failing to improve in recent days and traders fading every rally attempt, it is probably just a matter of time before sellers regain decisive control of the market. If the bearish scenario plays out, initial support is seen at 3,735, followed by the 2022 lows. On further weakness, the focus shifts to channel support around the 3,600 psychological level. On the other hand, if dip buyers step in to take advantage of the recent pullback and spark a bullish reversal, the first meaningful resistance to watch appears at 3,950, and 4,065 thereafter.

S&P 500 TECHNICAL CHART

(Click on image to enlarge)

S&P 500 Chart Prepared Using TradingView

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