US STOCKS OUTLOOK:
- S&P 500 mounts a strong recovery after last week’s punishing sell-off
- Despite positive sentiment on Wall Street, U.S. stocks remain biased to the downside, including the top equity benchmarks
- Market’s attention will turn to Powell’s congressional testimony on Wednesday and Thursday
After losing nearly 6% last week and posting its worst weekly performance since 2020, the S&P 500 rallied on Tuesday, supported by improving sentiment and, possibly, end of quarter rebalancing activity. In the early afternoon trade, the benchmark stock index was up 2.4% to 3,762, though it has risen as much as 2.85% in the morning.
Dip buyers are trying to take advantage of recent equity weakness and extreme oversold conditions to pick up cheapened and beaten-down shares ahead of a possible rebound in hopes that the worst may be over for now, at least until the next batch if important economic data and corporate earnings roll around.
Although the risk-on mood on Wall Street is welcome, the S&P 500 remains trapped in a bear market and maintains a negative bias based on technical signals as well as fundamentals. From a historical standpoint, the S&P 500 has endured 11 bear markets since 1950. After first meeting this condition, the index typically declined for an additional 1.5 months on average before reaching a trough in the cycle and beginning to mount a recovery.
Focusing on Tuesday’s price action, it is important to underscore that there will always be brief rebounds and face-ripping rallies in any bear market before the next leg lower develops. With that in mind, traders should exercise caution to avoid getting caught on the wrong side of the trade once again, especially considering there have been several false signals and dead-cat bounces in 2022.
Looking ahead, there are no major economic releases on the U.S. calendar for the next couple of days, but Fed Chairman Powell is expected to appear before Congress on Wednesday and Thursday to present the bank’s Semiannual Monetary Policy Report. Traders should carefully parse Powell’s comments for clues on the aggressiveness of the tightening cycle in the face of four-decade high inflation, with the understanding that any hawkish remarks will be bearish for stocks.
S&P 500 TECHNICAL ANALYSIS
The S&P 500 fell violently last week and set a new 2022 low, but failed to decisively break below cluster support stretching from 3,700 to 3,665. If this area holds in the near term, the rebound may have legs, but to have confidence that the worst is over and that this isn’t another dead-cat bounce, prices must climb above resistance at 3,810 and reclaim the psychological 4,000 level. On the flip side, if sellers retake control of the market and push the index below 3,700/3,665, all bets are off. Under this scenario, downside pressure could accelerate, paving the way for a move towards the 3,500 area, a key floor created by the 50% Fibonacci retracement of the 2020/2022 rally.