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Market Insights

S&P 500: breaking out soon?

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It’s all gone quiet in the S&P 500. After narrowly avoiding the technical bear market at the 3810 lows, the US stock index rallied back above the key 4100 area. The rally stalled and the past 7 trading days have seen rangebound trade.

Where next?

S&P 500 1 day chart

Bigger picture, the market is still trading below the 200 day moving average, well down from the 4800+ highs, and the fundamental backdrop has warranted caution for bulls.

But a clean breakout above the 4200 zone that has marked recent highs could encourage optimism, and the 20 day moving average has begun to curve higher too…

Still, caution is warranted ahead of this Friday’s key US inflation report. The consensus is for headline inflation to remain at 8.3% year on year, and print at 0.7% vs last month’s report. That’s still way too high, and would give the Federal Reserve no reason to pause their hiking cycle.

That said, there are signs of inflation relief on the horizon. Big retailers such as Target have loaded up on too much inventory and are now looking to shift excess stock during the next few months. Which means discounts and deals!

The retailer cut its second-quarter operating profit margin forecast to 2% from 5.3%, but expects to post 6% margins again in the second half of 2022. This was widely anticipated, as Target had already warned that they were carrying excess stock a couple of weeks ago. Investors responded by sending their shares tumbling (the gap below $209)

Target Corp

So, this could be the peak goods inflation that commentators and analysts have been anticipating for months. The other thing they’ve anticipated is a shift in spending from goods to services. And according to the latest PMI data, tourism is back en vogue!

Global sector PMI output trend

On their April earnings call, American Airlines chief executive Robert Isom said that

demand is as strong as we’ve ever seen it,”.


In more good news, China’s reopening. Things got off to a slow start, but business and life is returning to normal, which is starting to be reflected in Chinese markets.

Alibaba was our pick for stock of the week on the 24th of May:

“If investors see improvement in China’s outlook, Alibaba, one of China’s largest companies, could benefit.”


The price has rallied by approximately 30% since. Could a test of the 200 day moving average be in view?

Alibaba

Yet all of this comes against a backdrop of high inflation, rapidly rising interest rates, and the prospect of energy rationing in Europe…

IEA chief Fatih Birol told the Financial Times

“If we have a harsh winter and a long winter and if we do not take (demand side measures) . . . I wouldn’t exclude the rationing of natural gas in Europe, starting from the large industry facilities,”


To complete the gloomy picture, the World Bank has cut their global growth forecasts to 2.6% for 2022, and predicts "a protracted period of feeble growth and elevated inflation,"

"Subdued growth will likely persist throughout the decade because of weak investment in most of the world. With inflation now running at multi-decade highs in many countries and supply expected to grow slowly, there is a risk that inflation will remain higher for longer."

Prepare for the worst and hope for the best?

Not investment advice. Past performance does not guarantee or predict future performance.

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