S&P 500 OUTLOOK:
- The S&P 500 rallies in late trading after moving between small gains and losses during most of the day
- Improving sentiment may help stocks in the coming days
- The NFP report will be the most important economic data to watch this week
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Wall Street started the new month on the front foot, extending two days of strong rallies. Although stocks wobbled between gains and losses for most of the day, they managed to push higher in late trading thanks to improved risk appetite and fears of missing out (FOMO) on the market recovery. At the closing bell, the S&P 500 jumped 0.69% to 4,546, while the Dow Jones surged 0.78% to 35,405, boosted by a sharp upside move in Goldman Sachs (GS) and Boeing (BA) shares. The Nasdaq 100 also posted a decent advance, clambering 0.6% to 15,519, its highest level since January 2020 and whisker away from its 200-day SMA, a key technical resistance.
Although sentiment has improved in recent days, investors remain concerned that the Fed’s normalization cycle aimed at curbing inflation may be too hostile and undermine the rebound. For most of 2021, the S&P 500 was propelled higher by a torrent of fiscal and monetary easing, but as the spigot closes, equities are starting to feel the pinch from lower liquidity.
Looking ahead, the aggressive tightening measures contemplated by the central bank will continue to be a major headwind for stocks, especially those in the technology and growth space, which tend to be overvalued. However, with the economy slowing rapidly and expected to stall in the first quarter, the monetary policy outlook may soon begin to shift to reflect a shallower hiking path, providing more respite to the most speculative corners of the market.
To understand what action the Fed might take in the coming months, traders should closely follow this week’s key economic data, especially the January nonfarm payrolls report due Friday. Median expectations suggest employers added 150,000 workers last month, but many Wall Street firms anticipate a negative print, including Goldman Sachs, which sees a loss of 250,000 jobs due to the omicron wave.
A very weak NFP result is likely to fuel recession talk, leading traders to price in a less hawkish Fed. In theory, this could boost rate-sensitive and long duration stocks, while weighing on the value factor, at least until the noise begins to dissipate from the data and there is a clearer picture of the health of the economy.
S&P 500 TECHNICAL ANALYSIS
After reclaiming its 200-day simple moving average yesterday, the S&P 500 has accelerated its rebound, reaching a key resistance in the 4,550 area on Tuesday amid strengthening bullish momentum. If buyers manage to push the index above this barrier, the 61.8% Fibonacci retracement of the 2022 sell-off would become the immediate upside target, followed by 4,635. On the flip side, if bears reassert themselves and spark a reversal in the coming sessions, technical support is seen at 4,490, though a move below this floor could pave the way for a retest of the 200-day SMA near 4,440.
S&P 500 TECHNICAL CHART
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—Written by Diego Colman, Contributor