Is the S&P 500 corrected in a bull trend, or has it started a bear trend? The current movements of the stock index price are not similar to the previous events in the uptrend. Let us discuss the Forex outlook and make up a trading plan.
Monthly S&P 500 fundamental forecast
Goldilocks economy or the Fed’s intention to keep interest rates high for an extended period of time? What worries investors more? Judging by the S&P 500’s more than 8% drop from its July highs, Greed has given way to Fear in the stock market. The benefits for risk assets from a strong US economy amid slowing inflation have so far given way to the Federal Reserve’s insistence on keeping borrowing costs at 5.5%, no matter how bad the news could be. As a result, the broad stock index is poised to record its third consecutive close in the red zone. This hasn’t happened since the start of the pandemic in 2020.
Dynamics of S&P 500
It is difficult to define whether it is a correction in a bull market or a bear trend that has started. It looks like a bear market now. Only two-thirds of the S&P 500’s constituent stocks are up over the past 12 months, compared with 88% to 97% during the last four up markets. Half of the broad stock index’s gains came from just 8 stocks. Previously, this required a minimum of 38.
About 73% of S&P 500 companies that reported earnings performed better than expected, according to FactSet data. This is below the five-year average of 77%.
Hopes for a strong economy, including Bloomberg’s expected acceleration of US GDP in the third quarter from 2.1% to 4.3%, and the associated Goldilocks economy are unlikely to support the S&P 500. Over the past few months, positive domestic news has turned bad for the stock market. I don’t think the situation will radically change soon.
The rally in US 10-year Treasury yields has delivered a double to stock indexes. Stocks now perform worse than Treasuries in terms of yields. The process of capital outflow from the stocks began. Indeed, yield-seeking investors need to understand that they live in a different world. They have the opportunity to make profits from a much safer place than equity securities. Why not use it?
Dynamics of profitability of stocks and bonds
In addition, the rally in Treasury yields has driven down the stock’s fundamental valuation, and they now look less attractive. Investors believe the S&P 500 climbed too high in July. The current sell-off looks logical, and when the pullback ends depends only on the Fed. According to JonesTrading, when the central bank begins to cut rates, fearing for the economy, the downward correction will exhaust itself. In the meantime, investors will continue selling off stocks.
Monthly S&P 500 trading plan
Should the rebound in US 10-year Treasury yields be interpreted as market noise? Or is it about a change in trend? I don’t think bond yields will drop low. Most likely, they have room to grow. And the S&P 500 has room to fall. I suggest holding down shorts entered on the price rise to 4370 and adding up to them. The targets are at 4140 and 4050.
Price chart of SPX in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.