Is there another leg down for S&P 500? $SPX

We are now in 1st October 2021.

Looking at the Daily S&P 500 Futures Chart, I’m seeing strong evidence of further bearish trend with the 20 EMA crossing over the 50 EMA.

Potentially, the index may dip to 4130 which is the daily 200 MA level.

Further downside is possible

Looking at the Weekly Chart, I’m seeing a possible further 5% downside for next week(s). Note that we are already -5% down. This would mean total of 10% correction. Beyond that, based on historical – it would seem that a bullish case is more likely over a bearish case. However it would be prudent to wait for a trend reversal sign.

US Debt Default Update – Risk Incoming ! #debt #default

I had been calling out this impending crisis since June 2021. We are now at 25th Sep 2021.

Do reference my post regarding the 3 options that the US Government had for approaching the US Debt Default potential crisis here

The democrats did not opt for Option 1. They are now left with 2 options.

1.Second option would be to set up a stand-alone vote to raise the debt ceiling. However this is not popular with Democrats as it exposes them as irresponsible spenders.

update: this option is not possible as it is now confirmed the Democrats need at least 10 GOP votes.

2. Instead of raising the debt ceiling, Democrats could try to suspend the limit for another year, either through a stand-alone vote or as part of an unrelated  bill. A one-year suspension would need to pass both chambers, and the Senate’s 60-vote threshold means Republicans could hold up the bill’s passage until they win concessions from Democrats on any number of other issues.

This is the only option left.

The Republican’s stand ?

Republicans have been saying for weeks that they will not support an increase. Senate Minority Leader Mitch McConnell on Monday reiterated this position. “Senate Republicans would support a clean continuing resolution that includes appropriate disaster relief and targeted Afghan assistance. We will not support legislation that raises the debt limit.”

There could be a long drawn out conflict between Democrats and Republicans leading up to October/November.

I am of the thought that the markets may consider this bear scenario and resume its correction which is now at –5% from this coming week.

For those who are already invested, i would suggest

  1. To invest in good companies with consistent earnings, positive operation income,
  2. Low PEG, low PE Ratio.
  3. Stay away from Chinese stocks due to regulation risk. If you must, trade Chinese stocks with stop loss, do not invest in them
  4. Consider investing in safe haven assets e.g. gold . GLD certainly seems at a attractive price point at the moment. (i am not holding GLD now)

High Impact Events – September 2021 Week 4

There are 3 high impact events in September 2021 Week 4

Expect Powell’s speech on 29 September to carry on the same narrative from Week 3.

I do not expect the Core PCI and PMI to have material impact on the markets

  1. FOMC have already stated their narrative of bond tapering to tentatively start from November.
  2. Correction has already started. $SPX is already down 5% . Technically the market has not rebounded yet.

For my readers, do not let your guard down in Week 4. The correction has started and $SPX is still down 5%. Notice the lower highs and lower lows. There is no sign that the correction has recovered yet.

All eyes are also now on the impending debt limit drama coming up which could accelerate further correction from next week


High Impact Events – September 2021 Week 3

There were four high impact events in September 2021 Week 3

The four events were all from the FOMC.

The Federal Reserve is wrestling with how to continue getting Americans back to work after the historic COVID-19-induced downturn while guarding against a persistent surge in inflation.

It’s a delicate balance.

Citing an outlook for faster inflation but slower economic growth than it previously forecast, the Federal Reserve on Wednesday signaled plans to begin tapering its bond buying stimulus by year’s end and possibly raise interest rates in 2022, a year earlier than it had anticipated.  

The central bank is buying $120 billion a month in Treasury bonds and mortgage-backed securities to hold down long-term rates. It reiterated it will continue the purchases at that pace “until substantial further progress has been made toward” the Fed’s goals of full employment and 2% inflation. 

For a second straight meeting, the Fed said the economy “has made progress toward these goals.”

And in its statement after a two-day meeting, Fed officials said, “If progress continues broadly as expected (toward the Fed’s employment and inflation goals), the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”

At a news conference, Fed Chair Jerome Powell said the central bank could well announce that it will start cutting back the market-friendly bond purchases at its next meeting in early November.

Ian Shepherdson, chief economist of Pantheon Macroeconomics, expects the Fed to start scaling back the purchases in November, unless Congress fails to resolve its standoff over raising the government’s debt ceiling, or borrowing authority. Under that scenario, Powell said he expects the purchases to conclude by the middle of next year.

The Fed launched the bond buying at the start of the pandemic to prevent Treasury and mortgage markets from freezing up amid investor panic, and then to push down long-term interest rates.

“Now we’re in a situation where they still have a use but their usefulness is much less, as a tool,” Powell said.

The Fed left its key short-term rate near zero but projected it could modestly raise it next year to about 0.3% and it will end 2023 at about 1%, above its June forecast of 0.5% to 0.75%, according to officials’ median estimate.

Nine Fed of 18 Fed policymakers now predict at least one rate hike next year, up from seven in June, a split that indicates the Fed could raise the rate by about half of the quarter point increase that is typical. And the officials now foresee three hikes in 2023, up from two in June, and two more in 2024.


Monthly Market Movements For September 2021 #DJIA #SPX

First of all , with respect to the weekly chart ,

negative case wise,

for equities – Dow Jones has already dip about 2% last week. We are at the 20 MA level. This is the first major support level for DJIA.

If this is broken over the next weeks, we will be looking at another 5% dip to 50 EMA

If this is again broken over the next weeks, we will be looking at 10% dip to 100 EMA

i am not optimistic that we will be looking at another 17.6% dip to 200 EMA as we just recovered from a bear market. Usually it takes about 5-10 years between bear markets.

Of course, there is always the positive case that DJIA can rebound from its 20 EMA level and continue on its bullish run as the 20 / 50/ 100 / 200 EMA levels are still in order and overall trend is still bullish.

similarly for SPX,

negative case wise,

for equities – we are reaching the 20 MA level. This is the first major support level for SPX.

If this is broken over the next weeks, we will be looking at another 8% dip to 50 EMA

If this is again broken over the next weeks, we will be looking at 17% dip to 100 EMA

i am not optimistic that we will be looking to a dip to 200 EMA as we just recovered from a bear market. Usually it takes about 5-10 years between bear markets.

Of course, there is always the positive case that SPX can rebound from its 20 EMA level and continue on its bullish run as the 20 / 50/ 100 / 200 EMA levels are still in order and overall trend is still bullish.

Overall for equities , there are more drivers for negative case over the next few weeks/ months due to the uncertainty of the US debt ceiling . You can read my post here .

The inflation play news has been already trumpeted by main stream media for the large part of this year. The market would already have built in the fact that interest rates are going to go up sooner or later.

whatever it is, the time is closing in on using your warchest for a shopping spree.

High Impact Events – September 2021 Week 2

There is only one high impact event in September 2021 Week 2.

US producer prices likely accelerated further in August. The headline rate may rise from 7.8% to close to 8.5%, while the core rate could poke above 6.5% (from 6.2%). However, the month-over-month increase may slow from 1.0% (both the headline and core) in July to around half as much in August.  For the headline, it would be the smallest increase of the year. After trending lower in July and most of August oil prices over the past two weeks. With WTI pushed above $70  again, it is a timely reminder that higher oil prices are not inflationary but rather the opposite.  The past three US economic downturns were preceded by a doubling of the price of oil.

The Fed issues two reports in the coming days: the Beige Book, which few read, many talk about, and rarely contains surprises.  The general takeaway is likely that many businesses still cannot find the workers they desire at the pay they offer, supply chain disruptions persist, and the broad economic expansion may have slowed a bit in recent weeks.  The high-frequency economic data has mostly disappointed, including the nonfarm payroll jobs gain.  Consumer confidence has suffered. Most states have reported an increase in the number of covid cases. 

The other report that the Fed issues, which tends not to be discussed nearly as much but has new information is on consumer credit.  With households reportedly flush with transfer payments and supposedly less commuter-related expenses, one might be surprised to learn that consumer credit (excludes mortgages but includes auto, student loans, and credit cards) is at a record high.  It rose by $93.3 bln in Q2 20.  The previous quarterly record was Q1 16, when consumer credit rose by $64 bln. According to the Bloomberg survey, the median forecast calls for consumer credit growth to slow to about $28.5 bln in July after a record $37.7 bln increase in June, which followed the record $36.7 bln in May.  

High Impact Events – September 2021 Week 1

The undoubted highlight of September 2021 Week 1 was the fall in Non-Farm Employment Change of 235k versus analysts’ estimate of 1053k.

In his recent Jackson Hole Symposium speech, Chair Powell noted that at “the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year”. 

In the same paragraph however, he also emphasised a need to monitor “the further spread of the Delta variant”. This latter point has proved prescient given the severity of the third wave of COVID-19 now being experienced by the US and, of course, August’s nonfarm payrolls.

At less than one third of the average of the prior three months, August’s 235k increase was a shocking outcome, particularly as these jobs would have been finalised in mid/late-July when new delta cases were but a fraction of the current level. There were some odd outcomes by industry such as leisure and hospitality stalling after increasing 350k per month for the past six, but no definitive reason to believe August’s print should be dismissed as a statistical aberration.

The questions that need to be asked at this point are: (1) did August’s payroll outcome come about because of changing demand or lingering supply constraints; and (2) how far off course does it put the economy in pursuit of full employment, a pre-requisite for rate hikes. 

Given job openings are at historic highs and other indicators of labour demand remain strong, the August nonfarm payrolls surprise looks to stem from supply constraints. This assertion is backed up by the participation rate remaining unchanged for the past four months, 1.7ppts below its pre-pandemic level. If we assume, as the world is, that this surge in US Delta cases will be brought back under control soon, the uncertainty presently impeding job matches should abate in coming months.

This one outcome is enough to preclude a September taper announcement. But, unless it proves the first of a string of weak outcomes, a taper decision at the December meeting will be made, allowing the process to still run to our existing forecasted timetable of January to June 2022.

Employment growth does not have to bounce back to near a million a month for this to occur. Ahead of the August print, we had anticipated a material weakening in job creation from September, with gains from that point to end-2022 forecast to average 450k – a little over half the pace of May to July, and only 80k more than August’s print if prior month revisions are incorporated.

Importantly, job creation of this scale would not only be strong enough to eradicate the remaining pandemic employment deficit of 5.3 million by September next year, but would also, come December 2022, see the creation of a quarter of the jobs that could have been established absent the pandemic, based on the pace of employment growth in the 12 months immediately prior to the pandemic.

Not only can we therefore still justify a first-half 2022 taper timeline, but also a first rate hike in December 2022. This, of course, assumes the current wave of COVID-19 in the US does not get any worse, which is why the FOMC now need to wait until December to make their decision.

However, it is important to emphasize here that August’s weakness was due to supply rather than demand. If average monthly employment growth instead slows materially below 450k into year-end due to a marked weakening in demand, the FOMC will find it difficult to forecast full employment by end-2022. Knowing well from their GFC experience the challenges a protracted recovery poses for an economy and its policy makers, this is not a situation the Committee will want to risk. Hence, if such downside risks crystalize, a taper decision is likely to be further delayed and its pace slowed while rate hikes would be pushed out into 2023.