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Risk-off Approaching

Monday, S&P 500 bulls managed to come back twice intraday, but I‘m afraid they‘re scraping the barrel. Tech earnings are ahead, UBS negatively surprised in the European morning, and the bulls may just not pull another rabbit out their hats next.

Before diving into the charts with respective market commentaries, let‘s bring up the macro, fundamental and technical case for a meaningful S&P 500 decline:

(…) the false dawn in manufacturing (and services) PMIs (similar to real estate) didn‘t spur enough Fed tightening bets. Even if oil corrected to my $77.50 Friday, that‘s though not enough to support all out rebound in PMIs unless the dollar agrees, and manufacturing would turn lower again over the coming 2+ months as LEIs continue declining for 12 months in a row and counting.

Even if there is calm in the banking sector, the Fed is set to not only raise by 25bp in May, but also to continue shrinking its balance sheet. Meanwhile, commercial banks experience continued deposits outflow, AAPL has entered with its account offering of over 4%, and fresh credit creation is hampered, adding to liquidity and M2 woes as much as Treasury having to turn around and start replenishing its General Account at the Fed soon.

For now, the relative calm allowing for tired S&P 500 upswing continuation, goes on as bears keep fumbling intraday on Monday too. The buyers are though running on borrowed time, and the downside remains greater than the upside – not only positive seasonality would be gone, but monetary policy won‘t really change in 2023 no matter how many rate cuts are priced into the bond market. Debt ceiling won‘t be resolved too quickly either – it‘ll still turn into a drama.

While earnings aren‘t so far outdoing the dialed back expectations on the downside (-6.2% decline this quarter is on track), housing lull is set to go, the job market‘s forward looking indicators are on a solidly deteriorating track already, and core inflation is to remain sticky – not allowing for jubilation or Fed victory declaration (Powell conference will surprise next week).

Meanwhile, the ever narrowing market leadership (one tenth of the S&P 500 stocks explaining around 90% of returns this year – market breadth I took on amply in the extensive analysis one week ago), reminds me of late 2021 topping process, and underlines that markets are most vulnerable when the leadership is narrow (hello AAPL and company).

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Let‘s move right into the charts (all courtesy of www.stockcharts.com).

S&P 500 and Nasdaq Outlook

S&P 500 and Nasdaq

4,136 followed by 4,115 remain the key bearish objectives (in need of some tech earnings catalyst). Low 4,150s represent the midpoint of a trading range, but not even breaking 4,188 (4,209 then) has the power to deal with non-confirmations and flip the medium-term outlook bullish. Much greater downside than upside risks simply, that‘s my conclusion.

Credit Markets


Another HYG spurt into the closing bell, but I‘m afraid it wouldn‘t be easy to extend gains in a risk-on way today really. Caution, still caution as TLT is to outperform on the upside.

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All essays, research and information represent analyses and opinions of Monica Kingsley that are based on available and latest data. Despite careful research and best efforts, it may prove wrong and be subject to change with or without notice. Monica Kingsley does not guarantee the accuracy or thoroughness of the data or information reported. Her content serves educational purposes and should not be relied upon as advice or construed as providing recommendations of any kind. Futures, stocks and options are financial instruments not suitable for every investor. Please be advised that you invest at your own risk. Monica Kingsley is not a Registered Securities Advisor. By reading her writings, you agree that she will not be held responsible or liable for any decisions you make. Investing, trading and speculating in financial markets may involve high risk of loss. Monica Kingsley may have a short or long position in any securities, including those mentioned in her writings, and may make additional purchases and/or sales of those securities without notice.

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