Source: Tradingview

During its current bear market rally triggered by hopes for softish landing, the S&P 500 has approached its 200-day moving average crossing at 4,060, which could act as a dynamic resistance for the index. The VIX index declined to a level that marked several tops for the stock market bounces in 2022. The daily chart suggests that the index might struggle to break its solid overhead resistance and could stumble much lower in the months ahead.

Broken supply chains have already caused inflation to rise substantially, and the Fed has been raising rates to tamp it back down. On top of the perfect storm of inflation triggered by prolonged supply problems, slowing growth has added to the toxic cocktail for equities. The spread between the 2- and 10-year yields reached -73.7 points, which is one of the most inverted levels in more than 40-years and cannot be recklessly ignored.

As inflation cools off, bonds could beat stocks in this final verse that has yet to fully play out. We are approaching the classic late cycle period between the Fed’s last hike and the recession. The Fed’s pause could coincide with the arrival of a recession given the extreme inflation levels.

In our view, the Fed would not pause until payrolls are substantially lower or even negative, which is the unequivocal indicator of a recession. Considering the mass layoff announcements, we have seen in recent weeks we might see massive decline in the Nonfarm Payroll readings as early as December. However, for now, the jobs market has remained stronger for longer even in the face of weakening earnings.

For the rest of November technicals are likely to take over and drive the market until the fundamentals return with next month’s Payrolls, CPI, and FOMC. The bulls and bears are battling for control and while at this point the winner is uncertain, we are inclined to believe the bear still dominates. The index is at a critical technical juncture, with price action struggling below its medium-term down trend line and its 200-day moving average, and momentum conditions still weak. Given the overall technical and fundamental backdrop and valuations not exactly a tailwind at this point, it appears there is more downside ahead before the bear market is over. While the down trend is still in progress, we are of the view that sometime in 2023 the market could turn. Once the Federal Reserve pauses its interest rate hikes, the economic growth slows and corporate profits slash, the index might then be close to an inflection point. Given we are not there yet, we see the current rebound as a bear market rally and further weakness to 3,300 points in the coming months as highly probable.

Astute investors looking to take advantage of the volatile up and down swings in the markets may consider our 3x Long US 500 and/or our -3x Short US 500 ETPs.