“…the SPX is just below the 4,475 level, which is double the March 2020 closing low of 2,237.40. Many investors may be anchored to this low and be tempted to take some money off the table if the index doubles the 2020 closing trough. Just overhead is the round 4,500 level…”
- Monday Morning Outlook, August 16, 2021
After the S&P 500 Index (SPX — 4,509.37) experienced an initial rejection at 4,475 earlier this month, or double its March 2020 closing low, the resistance proved temporary, as the equity benchmark drove through it last week. On Thursday, a pullback and retest of this key level proved constructive, ahead of Friday’s rally.
But as I mentioned in mid-August, a move above 4,475 would bring the next resistance area immediately into focus, with the round half-millennium 4,500 level a potential barrier. Moreover, the 4,507 level is a round 20% above last year’s close.
Round-number year-to-date (YTD) percentage returns are sometimes important, marking resistance or hesitation areas. Per the chart below, top pane, note how the SPX chopped around its round 10% YTD gain for about a month-long period in April and May. In this case, the level did not act as resistance, but it was a level that spurred enough profit-taking to slow the momentum in place since the March lows.
Looking ahead to next week, if bulls push the SPX beyond the 4,500-4,510 area, channel resistance could possibly come into play between 4,550 early this week and 4,565 later in the week.
“Anyone paying attention to comments from various Fed governors during the past few weeks were likely not surprised by tapering comments in those minutes…Now, the delta variant of Covid-19 is creating more havoc than other variants, generating concerns about the economic recovery around the world. This is ironic in context of the Fed’s view on the impact of the virus, according to its July minutes …. Interpretations are the Fed still isn’t as concerned with the virus’s impact going forward or it is dated information that this body was working with at the time.”
- Monday Morning Outlook, August 23, 2021
“Fed hawks circle before Powell speech as they push for bond taper”
- Reuters, August 26, 2021
“Federal Reserve Chairman Jerome Powell reaffirmed the central bank’s emerging plan to begin reversing its easy-money policies later this year… Still, Mr. Powell didn’t signal major concern in his remarks Friday. ‘While the Delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment,’ he said.”
- The Wall Street Journal, August 27, 2021
As I have mentioned the past couple of weeks, with earnings reports winding down, the Fed and Fed policy would come into focus as the economy recovers amid another surge in Covid-19 cases. Ahead of the Fed’s next meeting September 21-22, the Kansas City Fed hosted its annual Jackson Hole symposium, which began Friday morning.
Last week, I suggested that comments from the Fed in the July Federal Open Market Committee (FOMC) meeting minutes may have been dated when it downgraded Covid-19 risks to the economic recovery. However, just ahead of Chairman Powell’s Friday morning remarks to open the symposium, three non-voting “hawkish” Fed governors clued market participants into what Chairman Powell was about to say when he suggested that tapering should still be on the table for later this year, even though there is still near-term Covid risks.
As such, with no major surprises to begin the symposium, stocks rallied on Friday and volatility expectations, as measured by the Cboe Market Volatility Index (VIX -- 16.39), declined substantially. The VIX had popped on Thursday ahead of Powell’s Friday morning remarks. It is evident that the stock market is prepared for an eventual tapering that begins later this year as Powell characterized Covid risks as near-term only.
“Mr. Powell used the bulk of his speech to explain why he is still confident that this year’s inflation surge would prove temporary and why it is so important for the Fed to get this call right.”
-The Wall Street Journal, August 27, 2021
My personal take-away from Powell’s speech on Friday morning and the comments from other Fed presidents before and after his speech is that to the degree current voters on the FOMC are on board with Powell’s thinking, there could be more dissent in 2022 when new voters come on board. In other words, Powell still sees inflation as being transitory, which implies interest rates will remain at or near zero potentially well into, if not all, of 2022.
But such a view may not be as popular among voters when current non-voting hawks like St. Louis Fed President James Bullard, Cleveland Federal Reserve President Loretta Mester, and Kansas City Fed President Esther George become voters at the FOMC’s first meeting in 2022. To varying degrees, they are not as convinced that the inflation surge at present is temporary, which may create more uncertainty with respect to the timing of the lift-off with respect to interest rates.
Turning back to the short term, market participants will digest weekend headlines from the symposium. Plus, there is a plethora of economic reports due out this week. Traders will focus on consumer confidence data, the ISM manufacturing index, and employment numbers that are released throughout the week. Any data that diverges significantly from what the Fed is projecting could possibly unsettle markets, as bulls have likely factored in continued economic progress, even amid the near-term risks from the virus.
If selling emerges, the first area of potential support is at 4,475, which marked a temporary peak in mid-August. Channel support is between 4,413 and 4,432, which is in the range of the SPX’s July peak at 4,429.
Continue to emphasize bullish positions, unless and until there is significant deterioration in the market as I outlined last week.
Todd Salamone is Schaeffer's Senior V.P. of Research
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