Odds Favor Shorts Near-Term If S&P 500 Rallies To 2800+

Post-Powell’s supposed dovish switch last week, equity bulls spent lots of energy to rally the S&P 500 within less than two points of the 200-day. If the trade-tariff truce the US and China reached over the weekend in Argentina is viewed favorably and the index rallies to 2800, shorts are likely to get aggressive.


Jerome Powell, Fed chair, kicked off a powerful rally in stocks last week. His Economic Club of New York speech on Wednesday was viewed as dovish. Early October – on the 3rd to be precise – he said interest rates were still “a long way” from neutral. In that very session, the S&P 500 large cap index began its waterfall dive. By October 29, it was sown 11.4 percent (Chart 1).

When Powell made that comment, stocks, in general, were deeply overbought and were looking for a reason to sell off.  He provided one. With three 25-basis-point hikes already in the bag this year and a hike in December (18-19) all but certain, markets concluded the Fed was on its way to tightening a lot more than they had priced in. The FOMC dot plot expects three more hikes next year.

Come last Wednesday, Powell supposedly did a U-turn. He said rates were “just below” the neutral range. An oversold equity market interpreted this as a shift downward in his prior hawkish stance. Last week, the S&P 500 (2760.17) jumped 4.9 percent.

Is Mr. Market correct in its assessment? Let time be the arbiter of that.


We do know this. Although not a whole lot has changed between October 3 and November 28, US macro data have been in deceleration. If anything, the trend has gotten more entrenched of late.

In the 12 months to October, core PCE – the Fed’s favorite measure of consumer inflation – rose 1.78 percent, an eight-month low. As recently as July, it rose 2.02 percent, which was the first two-plus reading since April 2012 (Chart 2). The Fed has a two-percent target on inflation. Other data, such as ISM manufacturing and GDP, are similarly softening.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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