S&P 500, Nasdaq 100, US Dollar, Event Risk and FOMC Rate Decision Talking Points:

• The Market Perspective: S&P 500 Eminis Bearish Below 3,900; USDJPY Bullish Above 132.00
• The Q4 GDP update this past session beat expectations and the Fed’s favorite inflation indicator (PCE deflator) is due for release Friday
• Between the progress in certain risk assets (like the Nasdaq 100), the remarkably constraints on the Dollar and the heavy event risk next week; expect Friday confusion

When we approach a market with a preconceived bias, there will often be evidence that we can select to justify our view. I don’t claim to have a clear perspective on what the next leg of the financial system will look like, but do believe there to be significant indecision with reason to expect further uncertainty over conviction through the immediate future. That perspective is shaped not by the technical cues of assets nor through a sense of fundamental focus, but rather something more rudimentary: the greater weight of anticipation for more significant event risk ahead versus the lackluster backdrop for conviction with which we are currently dealing. That will be something to keep in mind as we move through Friday and even into early next week. Some of the major US indices have made significant technical progress while the Dollar is overdue for a break from an extremely narrow range. Yet, those conditions alone do not redefine the backdrop of the broader market.

Taking stock of where sentiment seems to be solidifying behind a distinct measure of enthusiasm, the US indices have started to pick up a sense of motivation that global counterparts (eg DAX, FTSE 100, Nikkei 225) and alternative ‘risk assets’ (eg emerging markets, junk bonds, etc) have started to struggle with. The S&P 500 has been in the thick of bolstering the bulls for the longest period with the progression of the 200-day SMA break, 2022 trendline clearance and then erosion of long-term Fib levels all around the 4,000 level these past few weeks. With Thursday’s close, there seemed more conviction from the bulls compared to anything attempted to this point. A gap higher on the open would eventually see further follow through to the tune of 1.1 percent gain on the day. We seem to have escaped the gravity of the 4,000 level, but does that truly lift the gates for bulls?

Chart of S&P 500 with 200-day SMA and Volume (Daily)

Chart Created on Tradingview Platform

Where the S&P 500 has fought hard for its gains, the Nasdaq 100 was in a far better position to rouse the opportunists. The tech-heavy index played the role of the speculative torch during key periods of the more than decade-long climb after the Great Financial Crisis – and again in the initial surge after the pandemic collapse. More recently, it has significantly underperformed relative to the broader S&P 500 or Russell 2000 and certainly the ‘value’ oriented Dow Jones Industrial Average. Hacking away at that engrained bearishness, this week has seen a break of the 2022 bear trend on Monday; and this past session, the gap-charged rally pushed the Nasdaq above its 200-day SMA for the first time in 203 trading days. That calls an end to the longest stretch for the market trading below this very recognizable technical measure in two decades. For someone that abides principally by the charts, this would look very provocative indeed. Yet, in these conditions, our assessments should be based on broader reads.

Chart of Nasdaq 100 with 200-day SMA and Spot-200SMA Disparity (Daily)

Chart Created on Tradingview Platform

Perhaps a better reflection of the fundamentals and market conditions is through the chart of the DXY Dollar Index. The trade-weighted representation of the Greenback has shown a reticence to commitment that is nothing short of extraordinary. While the DXY has technically inched out a slight extension of its 7-month low on a 50 percent retracement of a 22 month rally in a mere four months, there really has been no material progress to speak of in the bears’ course in two weeks. In fact, the 10-day historical range from the DXY (as a percentage of spot) is comparable only to the holiday conditions at the end of 2022, and before that we have to go back to February to find anything comparable. This is patience – or frozen anxiety – waiting for a more definitive and capable driver.

Chart of DXY Dollar Index with 200-Day SMA, 10-Day Historical Range (Daily)

Chart Created on Tradingview Platform

The equities advance this past session would naturally lead those looking for justification to pull from the fundamental well. A Q4 GDP beat from the United States would certainly serve that purpose well. The 2.9 percent annualized rate of growth was faster than the 2.6 percent expected, but not far off the market. Further, much of the debate over an impending recession seems to be rooted in the second half of the year. We won’t have clarity on that anytime soon – unless we have the NBER offer us a definitive ‘recession’ call (there is no definitive ‘all’s clear’ sign). While GDP and the other data points out on the day was encouraging, it hardly resolves the market’s issues of a definitive turn in favor of optimism. That is particularly going to be the case when there is so much serious event risk that is capable of moving the needle in the week ahead. So, while there is another top event on tap for the final trading day of this week (the PCE deflator), it would be wise to restrain your expectations for its level of impact.

Top Global Macro Economic Event Risk for Next Week

Calendar Created by John Kicklighter