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Market Insight - Rate rises and their impacts on Economic Numbers

Market Insight – June 22nd, 2022.
• S&P500 – Down by 21.87%, can the S&P 500 fall further?
• Rate rises and their impacts on Economic Numbers!
• How far is S&P 500 from Recession Territory?
• Bear Market Rally is a Dead Cat bounce!

Market Insight – June 22nd, 2022.

  • S&P500 – Down by 21.87%, will the S&P 500 fall further?
  • Rate rises and how they impact the Economic Numbers!
  • How far is S&P 500 from Recession Territory?
  • Bear Market Rally, is it a Dead Cat bounce!

S&P 500

S&P500 is down by 21.87% year to date and had its worst 100 days to start a year in more than 50 years. US stocks witnessed a rally on Tuesday as markets touched 3780 points. In the past 2 sessions, the index is up by 128 Points about 3.52%. Along the lines, the Nasdaq 100 was up by 2.51% yesterday. Meanwhile, Dow Jones climbed by 2.15% in the rally that markets staged on Tuesday. The pertinent question for all the investors at this stage is if the index can fall further? The answer this question we need to look at if the equities prices have fully priced the risk of recession and if have Federal Reserve has taken enough measures to control Inflation?

Historically, there is a lag of about 4 to 6 months between the Fed's raising rates and its impact on the economic numbers. As shown, Fed is taking a gradual approach to increasing rates. Each increase can then be offset by 4 to 6 months to show their impacts. This relates to the lag between the Index Peak and the start of the recession and the Index bottoming before the end of the recession. The US is moving towards sustained inflation and recessions or both together as they are termed as ‘stagflation.’ Fed Raised the interest rates by 0.75% the largest single interest rate increase since 1994.  Such rate hikes, in turn, would increase the costs of borrowing for individuals and consumers and are forced to cut down on purchases including homes. And this would in turn cause the economy to slow. The continued raising of interest rates by the Feds could do more harm than good.

Chart Analysis

The above S&P 500 chart shows that the Index fell by 12.93% in the month of June alone, starting from the peak of 4176 points to touch the trough at 3636 points. The chart shows the Index is trading far below the 50-day SMA and 200-day SMA lines. It depicts a full bearish bias of the investors and Bearish is when investors believe the markets or particular security will continue to fall in its value.

Trade Insights – US500

The chart shows viable long positions above the Key support level at 3710 with the target of Pivot at 3870. And then to the Key Resistance level at 3970 points.  

Alternatively, Short positions below the Key Support level at 3710 with the target of Support Zone at 3580 to 3540.

Bear Market

Bear Market is a period when Market Index declines by more than 20% from its recent high. Year to date the Index is down by 21.87% now and it is already in the Bear Market Territory. What we witnessed again on Tuesday could be another Bear Market Rally or a Dead Cat bounce that happens when selloffs lure investors chasing cheaper valuations and they believe the worst is over and start buying again. Whereas a Recession is defined as two consecutive quarters of negative economic growth measured by GDP. Bear Market affects stock prices while a recession affects the overall economy.

See Chart of the Week

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The information provided is of a general nature and is not intended to be personalised financial advice. The information provided is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.

Trading in Rockfort Markets derivative products may not be suitable for everyone as derivative products may be considered as high risk. Please ensure that you understand the risks involved. A Product Disclosure Statement can be obtained here and should be considered before trading with us.

Vishal, R

June 22, 2022

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