Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio and Technical Strategy.
The market finally took a breather this week after a strong start to the calendar year. While we thought a “rest” was inevitable as the market was in overbought territory, the market had been resilient and the technical momentum was becoming difficult to ignore. However, the technical picture has quickly reversed course with the S&P 500 down nearly 5% off its recent high and over 2% over the last week after a failed break-out amid a rally in break-even inflation expectations, interest rates and the U.S. Dollar.
The index now is sitting right near key support levels (uptrend support at 3995, 50-DMA at 3980, and 200-DMA at 3940) as MACD is moving lower and RSI is suggestive that the market may be near-term oversold levels. We believe the S&P 500’s failed breakout is a reality check and reminder that 1) markets are not ready to see an easy glide path back to new all-time highs and 2) volatility is likely to continue even within the 3700-4300 range over the coming weeks/months.
For now, we continue to see inflation and the path forward from the Federal Reserve (Fed) as the main focus for investors. The eventual terminal rate for federal funds will continue to be hotly debated, but it appears the market is now pricing in more of a hike-and-hold strategy by the Fed versus prior expectations of pivot in the back half of the year, which is likely pressuring equities as interest rates move higher. Wednesday’s Federal Open Market Committee (FOMC) meeting minutes suggest that while the Fed members see more increases as warranted as “inflation is unacceptably high”, the members will continue to debate the pace of rate hikes, as more aggressive actions can allow the Fed to reach its intended targets quicker while a more measured approach will allow the Fed to assess the impact of the rate hikes. However, the market has increased expectations for the terminal rate of hikes since the beginning of February as inflation has proved stickier as seen by market implied break-even inflation expectations.
PCE data, a favored inflation metric for the Fed, is expected to be released on Friday, and we believe this could be a catalyst. A PCE reading showing moderation in inflation could entice buyers, pushing equities above the recent peak. A more neutral report could cause a short-term relief rally as the market seems to be oversold in the near-term with both RSI and the percent of equities above the 10-day confirming the recent selling pressure. However, a PCE reading suggestive that inflation may be stickier, could further pressure equities. A break below the 200-DMA, the technical picture deteriorates, and the S&P 500 could slide to the 3850-3900 area followed by 3800 level. We would use weakness as opportunity to accumulate favored stocks for the longer-term as the percentage of equities trading above the longer-term averages (50-DMA and 200-DMA) remain in uptrends and supportive for equities.
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