US stock markets are up big as we begin the trading day on October 4th 2022:
The Dow Jones is up 961 points (2.35%), the Nasdaq is up 330 points (3.06%) and the S&P 500 is up 96.63 points (2.63%) within the first hour of market open.
In previous Market Moments, I have warned investors and traders that equity markets are battling at a major support zone. I also called a bounce from these levels based on two charts. Don’t worry, we shall take a look at those two charts again.
Many are saying this is the bottom, but from a technical approach, it is still too early to call a bottom and a reversal. Currently, this is a relief rally in a downtrend and sellers are expected to enter once again UNLESS we take out a certain resistance price level.
Just yesterday I wrote about the Kiss of Death pattern which just triggered on the monthly S&P 500 chart. Generally we expect 2-3 months of green gains before the markets begin the real drop. It so happens that October-December sees the best average returns for the stock markets.
On the daily chart, the S&P 500 is climbing over the previous lower high set at 3720. More importantly, the S&P 500 is also recovering from breaking down on September 30th. We have a false breakdown. A bear trap.
The zone of importance for me still is the 3900 level. However, a break above that could become more likely with a close above the moving average.
The US dollar continues to drop lower as it pulls back to retest the breakout level around 108. I am also watching 110 to see how the dollar reacts. As the dollar drops, it will be positive for stock markets, precious metals and cryptos. Risk on assets move higher.
This is the important chart. Yields have been dropping in the past few days. In my opinion, this is what has been driving markets higher. Yields are still in their pullback phase, it is too early to call a reversal. However, if yields do reverse, then we can expect markets to continue to drop lower.
And this is now where we delve into fundamentals. Fed pivot is back in mainstream headlines.
I warned that markets were expecting a Fed pivot due to a recession, but instead, the Fed remained hawkish and the markets went back to the inflation narrative.
Recently, I am seeing more market calls for a pivot due to the Bank of England fiasco. The Bank of England had to step in to buy long term debt to provide liquidity and order in the British debt markets. Just so you understand the magnitude, there were really no bids for British debt. Not even a sh*t bid.
With things ‘breaking’ due to rising interest rates, many are expecting the Fed and other central banks to pivot. The only thing is that if they do, inflation will still remain high unless demand drops. Perhaps a recession will be enough to see this drop in demand.
Barry Sternlicht just came out and said that the Fed is going to cause “unbelievable calamities” if they keep raising interest rates. In an attempt to tame the highest inflation in decades, aggressive central bank policy will damage the global economy. This is the predicament.
Even the United Nations has come out to say that central banks should stop raising interest rates, saying a recession is linked to ‘imprudent’ monetary policy‘.
So will central banks capitulate? With Core CPI still coming in strong, I don’t believe they will capitulate just yet. However, their language and rhetoric may change. Perhaps the Fed and other central banks tone down on their aggressiveness and say they will start to raise rates slowly while assessing incoming data. It appears that’s what the markets want…and are pricing in. But it is still too early to tell as yields are technically just in a pullback period.