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Market Insights

Scaddon analysis for Skilling

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The SP500 has seen minor corrective action. Could we see more downside or will we see a move back to test all time highs? A summary of the fundamentals and sentiment and key technical levels to look out for below.

In terms of of the SP500, rate hikes by the Fed are bearish and we can see the number of rate hikes the market is pricing in for 2022 on the chart below:

Rate hikes by the Fed are bearish and we can see the number of rate hikes the market is pricing in for 2022 on the chart

While the Fed is hawkish, the SP500 has held up well: "Stocks are generally holding up on the view that this hawkishness (Central Banks) is aberrative silliness that will soon give way to the usual QE and money on a plate for those who never have to worry about what’s on their plate, even as hundreds of millions literally risk having nothing on theirs." (RABOBANK)

The market has taken the above view based upon what happened in 2018 - 2019. The Fed was initially hawkish in 2018 but turned dovish in 2019 and the market is looking for a similar scenario to unfold again. The big difference this time is that inflation is far higher than in 2018; it’s at a 40-year-high and the Fed needs to act quickly to bring it under control.

The Fed is unlikely to reverse course and turn dovish as their mandate is price stability and this would involve responding to inflation.

How Overvalued is the SP500?

There are many forecasters who think stocks are still good value at current levels but valuations are at bubble levels: "To put the equity market's valuation in perspective, if equity prices dropped 25% in 2022, or a decline four times bigger than the decline in the S&P 500 to date, that would only bring the Buffet Indicator back to the peak of the dotcom bubble. And a drop of nearly double that scale to bring it to the average of the past two decades." (Joe Carson, former chief economist at AllianceBernstein)

S&P Monthly Chart

Rate hikes are not the only problem for stocks. Perhaps a bigger problem is the removal of stimulus and the reduction of the Fed balance sheet. Fed stimulus and the expansion of the balance sheet was a big factor in terms of stock market strength but the Fed and most forecasters think it will end in May. The views of Goldman Sachs is shown below:

The views of Goldman Sachs

The SP500 has been a huge bull market but the fundamentals have turned bearish and valuations are at an extreme level, which warns of corrective action.

Technical Analysis

On the daily chart we have resistance at 4600.00 then 4700.00, support is at 4500.00 then 41500.00. A break to new daily lows could warn of a major correction down to monthly support.

Technical Analysis On the daily chart

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