Sentiment Changes

It seems the mood is starting to change for the markets. The headlines are shifting and the tone is becoming… less bullish.

This is not unexpected. Much of the most aggressive covid relief is either over or baked into the economic expectations now. Unemployment extensions ended last week. Another debt ceiling debate is ramping up. The infrastructure package is being debated. And the Fed, while still hedging its language, is indicating that inflation may cause a shift in monetary policy.

A simple trip to the gas pump or the grocery store will familiarize you with inflation. (Or try to buy a house!) Largely this has been dismissed by policy makers as both transitory and not part of the core CPI figure. But the masses aren’t fooled. Whether it’s food and energy or not, inflation is making the world more expensive in lots of categories. It’s hard not to notice.

The cries from Main Street seem to be finding their way to Wall Street. The question is, are they loud enough… yet? Last week’s market move lower may be an indicator. But, from a technical perspective, it’s not officially shown a change in trend.

Looking at the charts on a very short basis (hours or days), the pull-back last week accelerated down on Friday making it a 5-day losing streak for the SPX.

The thing is, even though it was a 5-day decline, the decline appears relatively orderly and found pricing support at the first wave overlap. Take a look at the chart below:

Note prices stayed within 1.5 standard deviations of the last 21-days of trading, and within the small decline range experienced in August.

So far, this thing doesn’t appear to be unraveling at all.

The issue is sentiment. If it begins to shift, the markets can decline from here. However, the question is, where does the money go? There are two competing ideas at play. One is sentiment headwinds, the other is a lack of places for capital to move to.

A quick look at the futures is indicating a positive open to the markets. However, it’s not a big move. So this week is going to be tough to call. After 5 days of declines, is is statistically likely Monday finishes in the black. But the charts are less convincing than the statistics. The set-up appears to be for a move back toward last week’s mid-way point around 4500. Otherwise, we could test 4395 support. If that happens, we’ll want to take stock of the headlines. A 3 or 4% slide could be enough to spook a few investors.

Overall, the week looks like it will be pretty neutral. Expect some price-recovery from last week’s declines early in the week. A close above 4500 on Monday or Tuesday will likely indicate a move back toward last week’s highs. Failure to close above this level will signal a continuation of last week’s down-trend.

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