This article was written exclusively for Investing.com
Over the last few sessions, we have seen lots of indecisiveness in the markets. The major US indices have consistently opened weak, before rallying into the close. But one thing that has been lacking is any real follow-through. Could that change today, and in what direction?
The US stock market has repeatedly failed bearish traders and analysts alike, and while I don’t consider myself as a stock market bear, I can’t help but feel that at least a short-term correction is likely. We have already seen some technical damage amid a few bearish fundamental developments—more on this later. But first, let’s focus on technicals.
Like a growing number of major indices, the S&P 500 has already broken below its medium-term bullish trend line. Although the US benchmark index hasn’t moved much lower since, the upside has been capped by the backside of that broken trend line and resistance around 4485 or thereabouts:
The fact that the buyers have been finding it difficult to quickly reclaim the broken trend line points to bullish exhaustion. What’s more, the index is holding below the 21-day exponential moving average, which is an objective way of the market telling us to be cautious.
The bears need to step it up here, after this week’s mostly side-ways chop. A clean break below the short-term term trend line could trigger a bigger move as the bulls rush for the exits and short sellers step in to take advantage of the new momentum.
Below this week’s current low of 4435, the immediate downside target is at 4414/5, followed by the liquidity below the next low at 4347.
So, although index futures have started positively today, things could look and feel a lot different later on in the session, or perhaps early next week if stagflation concerns intensify. Surging oil, gas and electricity prices have raised inflationary pressures stemming from supply bottlenecks and temporary factors.
Meanwhile the recent trend of economic data from China and the US have not been great, raising fears that the economic recovery is slowing at the world’s two largest economies. Further pickup in inflation momentum will make life very difficult for central banks. They will have to tighten their policies to prevent hyperinflation risks. This will not be good news, especially for growth stocks. But it could also be bad for other sectors as rapidly rising energy prices in Europe has forced some factories to halt production. Rising input costs are going to squeeze manufacturers margins and hurt their profits. The drop in buying power of consumers will only make things worse.
It is worth pointing out that we have the University of Michigan’s inflation expectations and consumer sentiment surveys coming up later. Inflation expectations have been climbing higher along with actual inflation. If consumers’ inflation expectations rise further, then this can manifest into real inflation, as workers will push for higher wages to compensate for rising prices in order to prevent their real earnings from dwindling. If inflation expectations rise further, then this will likely be bad news for stocks as it would increase the likelihood of the Fed having to taper its QE program faster to avoid overcooking inflation.
It is also worth keeping a close eye on Apple shares (NASDAQ:AAPL) after the not-so-great reception to the release of the new iPhones. If Apple moves, it could impact the tech sector as well as the NASDAQ 100 and to a lesser degree the S&P 500.