S&P Slips 'N' Slides

So, as another week in financial markets draws to a close its time to revel in your gains or wallow in (sorry, learn from) your losses. Looking around at the action this week and talking with traders of all levels who have been in and out of the market over the week in a variety of asset classes and instruments, it seems the biggest gains have been made selling equities, specifically the S&P and, in the spirit of FOMO Friday, this is also the trade which the most traders have told me they wish they’d been part of.

So, let’s take a look at what happened and break down why this was a great trade.

Sentiment Shift

There has been something of a sentiment shift in equities markets recently. With US treasury yields rising, stock markets have become spooked. The S&P last broke new ground on February 16th and has been in reversal since then as more and more focus has been placed on US yields and inflation expectations.

Rising Inflation Expectations

With the US vaccination drive moving ahead at a solid pace and with the government and health authorities confident that the country will return to normal, to a large extent, over the summer, traders are starting to look ahead with optimism. Now, while that might typically seem more likely to boost equities than cause them to sell off, the difference here is what that might mean for Fed policy.

Fed Tightening Expectations

The Fed currently has rates at record lows and is making record amount of asset purchases each month, which is what has been keeping equities markets so well bid over recent months. However, with traders now sensing that inflation is likely to start picking up as the country reopens and restrictions are lifted, the fear is that the Fed is going to be forced to back out of this easing ahead of schedule. The Fed is currently pegging 2023 as the date for lifting rates. However, many players feel that ahead of this time, the Fed is likely to have to start tapering its asset purchases. In short, the removal of this liquidity is bad news for stock markets and will cause a general tightening of conditions.

Fiscal Stimulus Disappointment

Now, added to this mix this week is the latest updates around Biden’s $1.9 trillion fiscal package. While the prospect of another huge round of stimulus is certainly a positive thing for markets, there has been some disappointment with the adjustments made which many feel will dampen down the impact of the package. Firstly, the doubling of the minimum wage from $7.50 to $15 has been scrapped. That would have had huge consequences for consumer spending.

Secondly, the direct cheques being sent out will now be sent out to 9 million fewer households as a result of new criteria in place. This again is bad news for consumer spending. Finally, with republicans threatening to delay the legislation there are concerns over when this bill will be implements, even if it passes and also as to whether it will suffer yet more watering down in the mean-time.

So, all in all, it’s been a pretty subdued week for risk appetite which seen equities taking the brunt of the hit. Once again, if you were in, congratulations on a great trade and if you were out, better look next time!

Let’s take a quick look at the technicals shall we.

Technical View

S&P500

So, in that last push into highs you can see we had a lot of bearish divergence which was a great signal that the move was losing momentum and there was risk of a reversal lower. Price has now broken through the 3786.25 lows as well as the rising trend line from last years lows. So, for now the outlook looks geared towards further losses towards the 3654.75 level which is the next big support.

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