S&P 500 Endures Necessary Discomfort (Analysis of Technique)
The S&P 500 has shown a lack of momentum since the end of July, with the index failing to make significant headway, according to recent market analysis. However, the August bar of the S&P 500 closed higher despite seasonal headwinds, offering a glimmer of hope.
Despite this, concerns over the labor market, weak seasonality, and a potential loss of momentum may lead to lower prices over the next month or two. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, has suggested that a correction for the S&P 500 could be on the horizon.
However, Williamson also believes that a correction, while potentially painful in the short term, could be healthy in the medium term and set up a year-end rally. This optimistic outlook is supported by an upside DeMARK exhaustion count for the S&P 500, which currently stands at bar 4 (of 9) in September.
The unemployment rate has seen a slight increase, rising from 4.2% to 4.3%, which may add to these concerns. However, last week's unemployment claims reading was 237k, indicating a relatively stable job market.
The Federal Reserve is expected to cut interest rates in September, October, and December, as per market expectations. However, stocks may not prefer a Fed cut if it's due to labor market concerns.
Thursday's Consumer Price Index (CPI) is expected to rise from 2.7% to 2.9%, which may influence the odds in subsequent meetings and heighten talk of stagflation. BLS revisions to jobs data are due on Tuesday.
The S&P 500 made an all-time high on Friday but quickly dropped back, and it continues to make further failed highs. Initial support for the S&P 500 on the monthly chart is the monthly low of 6360, while the next major upside target is 6958.
My ideal buying target for a correction, according to Williamson, is around 6200. Thursday's CPI may also influence this target, as a higher-than-expected reading could accelerate the correction.
In conclusion, while the S&P 500 has shown some signs of weakness, there are still reasons to remain cautiously optimistic. The upcoming CPI and jobs data revisions will provide valuable insights into the current economic climate and may influence the market's direction in the coming weeks.
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