Over the last five trading sessions, the S&P 500 and Nasdaq 100 experienced a positive but unremarkable week. The former rose by 0.79%, while the latter only gained 0.13%. Despite both indices experiencing a solid rally since the middle of last month, there are concerns about the Federal Reserve’s monetary policy path, which has caused jitters and undermined confidence on Wall Street. As a result, bullish momentum appears to be fading.
During the recent turmoil in the U.S. banking sector, traders promptly speculated that the central bank would immediately cease its tightening campaign and subsequently adopt a easing policy. While it is certain that the FOMC’s cycle of increasing interest rates will soon conclude, it is uncertain whether policymakers will reduce borrowing costs in the near future.
The volatility of the interest rate forecast has decreased its dovishness in recent days compared to mid-March. This shift can be attributed to two factors: the strong earnings reports from major U.S. banks on Friday and a significant increase in near-term inflation expectations as observed in the University of Michigan sentiment survey data. The chart below depicts the implied yields on 2023 fed funds futures contracts, which illustrate these recent market changes.
In the academic context, it is likely that stock prices will decrease rapidly if expectations for interest rates become less accommodating over a prolonged period. The market has remained buoyant since last month due to the prospect of several rate cuts in the latter half of the year. As a result, both the S&P 500 and Nasdaq 100 may face susceptibility to losses and remain in a vulnerable position in the short term.
S&P 500 TECHNICAL ANALYSIS
Regarding technical analysis, the S&P 500 experienced a downward shift prior to the weekend, as it was unable to surpass a clustered resistance level within the range of 4,165-4,195. This area signifies the convergence of the highs from June 2022 and February 2023 with a rising trendline that has been active for six months. If market decline persists in the near future, there is an initial support level at 4,075, followed by another at 4,040.
In the academic context, it can be noted that the S&P 500 may experience a resumption of its recovery. However, it is important to monitor the first resistance at 4,165-4,195. If this technical barrier is overcome, there is potential for a bullish move towards the 4,310 level. This level corresponds to the 61.8% Fibonacci retracement of the decline recorded in 2022.