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As he does after every monetary policy committee (MPC) meeting, the chairman of the Federal Reserve Bank in America, Jerome Powell, read out a very cautious and non-committal speech on 1st February 2023.
However, in answering questions from journalists he let slip that he foresaw just a couple more rate hikes before interest rates reached a “ceiling”. The markets took this to mean that rates would peak after, say, just two more 25-basis point hikes – in other words at around 5% - which was coincidently in line with what the committee had suggested after its meeting in December 2022.
Obviously, Powell was trying to conduct a very delicate balancing act in answering journalist questions, but he clearly gave the market the distinct impression that rates did not have much further to go – despite his clear admission that:
<ul style="text-align: justify;">
<li>The unemployment rate remains very close to full employment at 3,5%,</li>
<li>Job openings are running at 1,9 times the number of available employees,</li>
<li>The economy has created an average of 247 000 new jobs a month for the past 3 months.</li>
<li>Core private consumption expenditure (PCE) at 5% remains well above the MPC’s 2% goal.</li>
</ul>
The effect of this inadvertent “dovish” stance, combined with the relatively modest 25-basis point hike in rates, has been to fan the already over-enthusiastic flames of investor optimism. The S&P500 jumped up to new cyclical highs - but then was unable to convincingly break above the well-established support/resistance level at around 4170 before falling back on Friday (3-2-23).
In our view, the MPC and Powell in particular have become just a little too complacent about the progress of inflation in recent months, and in so doing they have pandered to the excessive bullish sentiment which has characterized this bear trend from the start.
While we agree that there may be some nascent signs that rising interest rates are beginning to impact inflation in some areas of the economy, we believe that it is far too early to be celebrating the imminent end of the rate tightening cycle. Inflation is at 40-year highs and the economy is creating jobs at a furious pace. The labour market remains extremely tight and there is strong upward pressure in wages. This is not the time to be giving the market hope of an imminent pivot in MPC’s interest rate policy. Consider the chart:
 
<center>
<figure class="figure"><a class="lightbox" href="/onlinecourse/images/sp_art5Feb2022.png" data-plugin-options="{'type':'image'}"> <img class="figure-img img-fluid" src="/onlinecourse/images/sp_art5Feb2022.png" /></a>
<figcaption class="figure-caption">S&P500 Index: January 2022 - 3rd February 2023. Chart by ShareFriend Pro.</figcaption>
</figure>
</center>
 
Here you can see the long-term downward trendline which signifies the bear trend which has been in place since the S&P500 index peaked at 4796 on 3rd January 2022. That trendline was significantly broken on Wednesday and Thursday last week, following Powell’s unfortunate remarks.
At the same time, the 50-day exponential moving average (black) broke clearly up through the 200-day simple moving average (blue) creating a “golden cross” buy signal. The golden cross is recognized as a very early and relatively sensitive indicator and we would advise watching the market closely for at least a few more days before acting on it too precipitously.
The fact that the S&P fell back from resistance at 4170 is however significant and may this week portend the dominance of more sober assessments by wiser investors. The 4170 support/resistance level has been very established as a critical level over the last year. Beginning from the two touch points on 7th and 14th March 2022 this level has been reinforced through areas of “backing and filling” shown by the red ellipses, followed by the resistance and support in August 2022 (shown by the red arrows) and now by the S&P’s failure to break convincingly above that level last week.
It is instructive also to look at the intra-day market action on Friday 3rd February 2023 (the red box) which we have zoomed out for you below:
 
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<figure class="figure"><a class="lightbox" href="/onlinecourse/images/SP_Idayart5fEb.png" data-plugin-options="{'type':'image'}"> <img class="figure-img img-fluid" src="/onlinecourse/images/SP_Idayart5fEb.png" /></a>
<figcaption class="figure-caption">S&P500 Intraday:3rd February 2023. Chart by Google</figcaption>
</figure>
</center>
 
<a href="https://www.google.com/finance/quote/.INX:INDEXSP#scso=_OIBvXeSCL7aq1fAPq6m6iAw6:0">S&P 500</a>
What you can see here is that the market began the day’s trade sharply lower at around 4140 and then rose to “bump its head” on the previous day’s close at 4179.76 in a perfect head and shoulders formation – before collapsing back to levels around its 4136 close. It ended the day 1,04% lower as a more rational assessment of the position took hold.
In our view, the exuberance of last week’s market following Powell’s remarks should not be regarded as a clear sign that the bear trend is over. We believe that what happened on the S&P500 on Wednesday and Thursday will probably turn out to be a rare “technical aberration”.
Of course, we can be wrong, but we would urge caution until this new upward “trend”, such as it is, is better established.