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S&P 500: Fed dashes hopes for ‘santa rally’

The S&P 500 was pulled back after the US Federal Reserve’s latest policy decision.

This benchmark index for US blue-chip stocks is currently testing support around the psychologically-important 4,000 mark, also where the 38.2% Fibonacci level from this year’s peak-to-trough decline currently resides.

Immediate resistance can be found at the S&P 500’s 200-day simple moving average (SMA).S&P 500: Fed dashes hopes for ‘santa rally’

 

What did the Fed say and do?

  1. The US central bank hiked its benchmark interest rates by 50-basis points, as expected, raising the upper bound of the Fed’s rates range to 4.5% at present.
    This latest 50-bps adjustment is smaller than the larger 75bps hikes at each of the Fed’s past four policy meetings, marking a downshift in the Fed’s ongoing battle against inflation.
     
  2. The Fed’s “dot plot”, which contains forecasts by each FOMC member for US interest rates, point to a median rate of 5.125% in 2023.
    That’s 50-bps higher than their September dot plot which forecasted a median rate of 4.625% for 2023.
     
  3. Fed Chair Jerome Powell once again harped on the notion that he and his colleagues at the FOMC have to keep sending US interest rates even higher before declaring that the battle against inflation has been won.

 

However, other segments of global financial markets are still massively doubting the Fed’s hawkish intentions.

  • Fed funds futures, which are the market’s forecasts for where they think US interest rates will end up, expect rates to peak at 4.87% by May 2023.
    That suggests merely one, no more than two, more 25-bps hikes over the coming months, before the Fed starts to move its benchmark rates back lower to help offset a potential US recession.
     
  • The US dollar, as measured by the benchmark dollar index DXY, is rising on the back of the Fed’s latest hawkish message.
    But for proper context, the DXY is still more than 9% lower from its multi-year high registered in late September.
    Dollar bulls (those hoping the prices will move higher) are clearly reluctant to send the greenback soaring, as they continue to anticipate the Fed’s eventual pivot, especially with a US recession all but certain in the second half of 2023.

US dollar bolstered by Fed's hawkish message

 

Stocks pay limited heed to Fed’s hawkish messaging

In recent past, investors and traders have been culpable of hearing only what they want to hear, fixating on the Fed’s eventual pivot rather than Chair Powell’s reluctance to prematurely end the central bank’s rate hike campaign.

Hence the S&P 500’s gains since October alongside gold prices, as the US dollar faltered in recent months.

However overnight, it looks like markets are being slightly more prudent, at least pausing to digest Chair Powell’s latest comments, as opposed to completely disregarding it.

The S&P 500 has now unwound all of its gains since the cooler-than-expected US inflation data released earlier this week which bolstered perhaps premature hopes that the Fed is warming up to the idea of lowering interest rates once more.

Such price action has all but dashed hopes for the “santa rally” = gains in US stocks typically occurring around the year-end period.

To be fair, the S&P 500 did come tantalisingly close to a bull market, with the rally from mid-October’s trough to this week’s post-CPI peak standing at 18.66%, just shy of that 20% threshold which denotes a new bull market.

 

Year-end season may still see sharp moves for S&P 500

Despite the year’s major fundamental catalysts now behind us, the S&P 500 could still see big swings between now and year-end.

This is likely to be more a case of the expected thinned-out liquidity over the final two weeks of 2022, which may exaggerate any moves in the S&P 500. After all, most traders and investors are set to pay a lot less heed to global financial markets, focusing instead on the year-end revelry.

 

S&P 500: Key support and resistance levels

  • Further declines for the S&P 500 may bring the 3920-3930 region into immediate focus, being a key support region for several episodes since May.
    This is also around where its 100-day SMA currently lies.
     
  • However, a greater appetite for risk between now and year-end could see bulls attempting to claw its way back above the psychologically-important 4,000 mark and also its 200-day SMA. Which currently resides at 4023.9.
    Resistance levels further afield can be seen at the recent peaks at 4105.6 (early December) and 4144.2 (post-CPI).

 

Ultimately, in order to meet the textbook criteria for a “bull market”, the S&P 500 has to climb above the 50% Fibonacci level at 4156.2 and also conquer the 20% mark (from its October low) at 4191.12.

 

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