US Equities Outlook:
- Now greater than +20% off their lows, a brand new bull market is taking form for US equity markets. Significant technical hurdles are being cleared alongside the best way.
- Measures of volatility are at multi-month lows, typical for this time of yr, but additionally an indication of rising complacency.
- According to the IG Client Sentiment Index, the US S&P 500 has a blended buying and selling bias within the short-term.
A New Bull Market
US inflation is persisting at close to multi-month highs whereas the US financial system is slowing down, however that doesn’t matter for US stock markets. Neither does the repeated warnings from Federal Reserve policymakers that extra fee hikes are coming over the following few months. Instead, US equity markets are taking a longer-term perspective: inflation will finally sluggish, forcing the Fed to pivot away from fee hikes to a impartial stance in early-2023, earlier than fee cuts arrive within the second half of 2023.
For now, issues appear sanguine for threat urge for food after the July US inflation report confirmed an sudden deceleration in worth pressures. US equity markets at the moment are greater than +20% off of their yearly lows, signaling the tip of the bear market that outlined a lot of 2022 and ushering in a brand new bull market altogether. While a number of technical hurdles have been cleared alongside the best way, it’s additionally price noting that complacency is beginning to creep into the image.
US NASDAQ 100 (ETF: QQQ; Futures: NQ1!) TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 1)
With yesterday’s shut, the US Nasdaq 100 broke the downtrend from the December 2021, January 2022, March 2022, and April 2022 swing highs. Prices proceed to trade in context of a bullish falling wedge breakout, which finally requires the US Nasdaq 100 to return again above 15,000 within the coming weeks and months. Momentum stays sturdy, with the tech-heavy index above its every day 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD continues to be trending increased above its sign line, whereas every day Slow Stochastics are holding in overbought territory. For the time being, a ‘buy the dip’ mentality ought to prevail.
US S&P 500, VIX, & VVIX TECHNICAL ANALYSIS: DAILY CHART (October 2020 to March 2022) (CHART 2)
Before inspecting S&P 500 technicals, a short interlude to take a look at volatility situations is important; they stands out as the solely fly within the ointment at current time. The VIX has dropped to its lowest degree since mid-April, whereas VVIX – the volatility of volatility index – has been persisting under 100 for its longest streak since early-2020. For higher or for worse, whereas these are typical situations for this time of the yr – the summer season tends to see lowered volatility as market participation wanes – these are additionally indicators of complacency amongst merchants.
US S&P 500 (ETF: SPY; Futures: ES1!) TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 3)
The persistent decline in volatility has been instrumental in paving the trail for the US S&P 500 to breakout of the descending channel in place for a lot of 2022. In tandem, the US S&P 500 additionally cleared out its June swing highs, suggesting that the bullish falling wedge stays the predominant sample, which factors for a return above 4,600 within the coming months. The US S&P 500 is above its every day 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD continues to pattern increased above its sign line, whereas every day Slow Stochastics have are holding in overbought territory. As lengthy as volatility stays depressed, a ‘buy the dip’ mindset stays applicable.
IG Client Sentiment Index: US S&P 500 Price Forecast (August 11, 2022) (Chart 4)
US 500: Retail dealer information reveals 35.63% of merchants are net-long with the ratio of merchants quick to lengthy at 1.81 to 1. The variety of merchants net-long is 4.96% increased than yesterday and 4.38% decrease from final week, whereas the variety of merchants net-short is 1.23% increased than yesterday and 10.67% increased from final week.
We sometimes take a contrarian view to crowd sentiment, and the very fact merchants are net-short suggests US 500 costs might proceed to rise.
Positioning is much less net-short than yesterday however extra net-short from final week. The mixture of present sentiment and up to date modifications offers us an additional blended US 500 buying and selling bias.
— Written by Christopher Vecchio, CFA, Senior Strategist