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Are stocks anticipating a soft landing?

Updated: Oct 17, 2023

The recent Consumer Price Index (CPI) remains too high as this suggests inflation at 3% is above the Federal Reserve’s 2% target. The Fed’s tightening progress to bring inflation down stalled in September, signaling the path to contain pricing pressures remains unsteady.

The good news is price gains have slowed from the 40-year highs from last year, at least based on the core inflation that excludes volatile energy and food. The bad news is that the sharp slowdown in core inflation during the summer months is rising faster than last month.

Nonetheless, many more market pundits and economists are optimistic about the U.S. economy. A recent WSJ survey suggests that a U.S. recession is no longer a consensus view. The belief is the Federal Reserve has completed its tightening cycle as inflation begins to normalize.

The latest quarterly survey hints that the probability of a recession within the next year has dropped from 54% to 48%. As the probability of a recession recedes, inflation pressures subside, and labor market and economic growth remain robust, this has fueled optimism for a soft landing.

The latest announcements from Fed officials also hint that they are willing to keep the Fed Funds rates steady at their next two-day FOMC meeting on 10/31 and 11/1. The rationale for this hinges on the recent sharp rise in the long-term interest rates to cool the economy. With borrowing costs increasing, it may substitute for any future rate rises from the central bank.

Although the economic picture has improved, economists warned higher interest rates, geopolitical uncertainties, including the Ukraine-Russian war and the recent Middle East conflict between Israel and Hamas, and higher energy prices can still derail the U.S. economy. Some speculate the Israel-Hamas war can spread beyond Gaza and increase the risks of higher energy prices and market volatility.

Large-cap U.S. stocks, as represented by the S&P 500 Index (SPX – 4,373.63), have declined 424.8 points or 7.15% from the 9/1/23 island reversal high (4,541.25), finding support at 4,216.45 (10/3/23 low). The ability to maintain above the 200-day ma (4,224), a higher low (4,216.45 – 10/3/23 and 4,219.55 – 10/6/23), and a positive-outside day (10/6/23) hints at a market bottom.

However, SPX remains confined to a trading range between the rising 200-day ma (4,224) and the declining 50-day ma (4,402). Also, technical damages incurred during the Jul-Oct 2023 setback will need time to repair (via technical base) before the next sustainable SPX rally.

Key initial resistance is 4,376-4,402 (50% retracement from 9/1-10/3/23, 10/10/23 high, 9/21/23 gap-down, and the 50-day ma). Above this extends the SPX recovery toward pivotal resistance at 4,417-4,430.5 (61.8% retracement from 9/1-10/3/23, 9/19/23 breakdown, and the 9/1/23 downtrend). A breakout here reaffirms the 10/3/23 low (4,216.45) and signals a sustainable recovery toward 4,458-4,461 (8/24 and 9/20/23 negative outside day highs), 4,511.99/4,541.25 (9/1 and 9/14/23 highs), and 4,607.07 (7/27/23 island reversal reaction high). A breakout coupled with a surge above 4,637.30 (3/29/22 high) signals a retest of 4,744-4,818.62 (Nov 2021 and Jan 2022 all-time highs).

Initial support rises to 4,312 (10/13/23 low) and below this to pivotal support at 4,216.5-4,224 (10/3 and 10/6/23 higher lows and the 200-day ma). Violation of 4,181 and 4,216.5 (38.2% retracement from Oct 2022-Jul 2023 rally, the May 2023 breakout, and the 50% retracement from Mar-Jul 2023 rally) warns of a deeper correction toward 4,048-4,049 (Apr/May 2023 lows, Jun 2023 head/shoulders top breakdown target, and the 50% retracement from Oct 2022-Jul 2023 rally), 3,918 (61.8% retracement from Oct 2022-Jul 2023 rally), and 3,765-3,810 (May/Dec 2022 and Mar 2023 lows).


Source: Chart courtesy of StockCharts.com


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