The bear market rally is entering a pivotal trading week

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It’s been another volatile week of trading the markets. Whereas the S&P 500 (SP500, SPX) rallied on Friday, garnered the support of a news article from the Wall Street Journal, and most importantly, the intervention of Japan In the currency market to defend the yen against the dollar to save the position.

Shares were set to drop sharply on Friday morning, with yields soaring and the dollar hitting multi-decade highs. Then around 9am, a news article from the Wall Street Journal indicated that the Fed might begin discussing the pace of raising interest rates in the future.

S&P 500 Index Futures

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At that point, S&P 500 futures were down about 1% and were at a critical level of support. If this support is broken, it will likely send S&P 500 futures down to around 3600. But then, at 8:52 am, everything was strongly reflected in the headline of the Wall Street Journal.

Beyond the headline, the article said nothing new, even referring to comments made by Federal Reserve officials nearly a month ago. No one who has listened to Federal Reserve officials over the past month should be surprised.

Moreover, the significant news came at 10:30 AM when Japan intervened to strengthen the yen against the dollar, sending the dollar/yen pair to trade sharply from around 152 to 146. This sparked a risk upside rally in equities. The monthly options expiration date led to a sharp deterioration in sell values ​​along with the new trend of traders buying out-of-the-money options with zero days to maturity, and we had a strong rally.

yen

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Bond yields race higher

Obviously, bond yields have risen sharply since the CPI report, the bond market has re-priced the Fed’s final rates significantly, and more importantly, the time it takes to reach that peak, stocks haven’t been re-priced in the same way. For example, since October 12, the 10-year rate has increased from 3.89% to 4.22%. Meanwhile, the S&P 500 rose from about 3,575 to 3,754, while the dividend yield for the S&P 500 rose from about 3,575 to 3,754. He fell From 1.84% to 1.74%.

S&P 500 for 10 years

Bloomberg

This allowed the spread between the 10-year yield and the S&P 500 dividend yield to rise to 2.45%. This is the highest spread since 2010, and most importantly it appears to be at an inflection point. Historically, when the spread reached this point, it acted as support or resistance. Is it possible that the market will return to some of the higher spreads, as bonds and stocks return to their pre-financial crisis levels? surely. But like any technical formation or pattern, when the market hits resistance, it pauses or pulls back for a while as it decides what it wants to do.

Dividend Yield - 10 Year Average

Bloomberg

drain

In addition, there was no additional liquidity entering the market. Last week, liquidity was drained from the market, with reserve balances dropping by nearly $50 billion to $3.05 trillion as the use of the reverse repo facility increased. Reserve balances have been a strong indicator of where the S&P 500 has gone, with balances typically leading the index by 5 to 15 days. More recently, the decline may indicate that the stock rally on Friday will not continue.

Reserve balances

Bloomberg

strongest dollar

In addition, there are signs that the dollar index could rise from here, with the possibility of forming an ascending continuation triangle. The dollar index has been consolidating around the 110-114 region since the end of September. In addition, the RSI has been steadily rising, indicating that the next significant move in the Dollar may be higher.

If the dollar collapses and pushes lower, this will be a risky sign that stocks may rise. If the dollar index breaks out as the chart indicates and rises, it will be negative for the stocks, continuing a sharp decline.

dollar

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Strong technical resistance

In addition, despite its rally on Friday, the S&P 500 was unable to get past significant resistance. The 3750 area is necessary because that was near the July lows, and we’ve seen previous lows act as effective resistance in the previous rally attempts. For example, in early June, we saw the 4,165 level acting as a significant resistance equal to the March lows.

If the S&P 500 can close behind the highs seen on October 4, there could be another rally at 3900 and possibly a gap at 4108. However, a failure to push beyond 3800 or close above it is likely to lead to a drop, if It was not a return to the lowest levels, but through it.

Stores

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At least for the time being, there isn’t enough to suggest that the stock market rally from last week is the real thing, and not enough of the stock re-pricing to reflect the recent upward move in prices.

Next week will be pivotal.

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