S&P 500 Technical Analysis
- US equities forecasted to see a massive cut in earnings growth in Q4 while remaining positive
- S&P 500 testing the 2022 low
- IG client sentiment hints at a bearish continuation with 65% of traders net long
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Last week’s better-than-expected NFP data appears to have eliminated hopes of a Fed pivot which saw risk assets perk up in the lead up to the data release. Since then, US equities have continued to sell off and now the S&P 500 (E-mini futures, ES1!) fast approaches the yearly low of 3571.75.
This years equity bear market is rather unusual as unemployment has held firm while interest rates have rocketed higher, at a phenomenal pace. Despite the sell off, S&P 500 earnings growth is forecast to drop by the most in the last two years, declining by 6.6%, according to FactSet. As a result, the estimated growth rate of combined S&P 500 is estimated to be 2.9% for Q3.
In addition to the actual earnings figures, forward guidance around Q4 earnings is also likely to influence market sentiment. For example, ahead of Q3 earnings nearly half of the S&P 500 constituent companies cited “recession” alongside their earnings reports, the most in over 10 years. Interest rates and inflation have risen even higher since then, compounding pressure on consumers and businesses.
Technical Analysis
The daily chart shows just how close the S&P 500 index is from printing a new yearly low. The low appears around the September 2020 level of 3590 which deterred further selling at the start of this month. Interestingly enough, the US 10 year treasury yield has backed away from the 4.02% mark which may provide short-term relief to equities due to the dollar following US yields almost in lockstep over the past few weeks.
ES1! Daily Chart
Source: TradingView, prepared by Richard Snow
The weekly chart helps to show this year’s decline in contrast to the sharp 2020 downturn. In 2020 stocks tumbled 36% while this far we have only seen the index trade around 25% lower from the peak. With interest rates likely to rise and remain elevated for longer than initially expected, US equities could be in for a tough fourth quarter, especially if the yearly low fails to hold.
ES1! Weekly Chart
Source: TradingView, prepared by Richard Snow
IG Client Sentiment Hints at Bearish Continuation
US 500:Retail trader data shows 65.01% of traders are net-long with the ratio of traders long to short at 1.86 to 1.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests US 500 prices may continue to fall.
The number of traders net-long is 6.15% higher than yesterday and 6.02% higher from last week, while the number of traders net-short is 7.28% lower than yesterday and 5.79% lower from last week.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger US 500-bearish contrarian trading outlook.
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— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
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