End of Week, Month, and Quarter
It has been an emotional ride for investors as the early cheers for a Fed pause gave way to uncertainties over stubbornly high inflation, recession fears, and turmoil emerging from the banking system.
As the end of the week, month, and quarter arrives on Friday, March 31, 2023, the next Personal Consumption Expenditures (PCE) Price Index also comes out the same day.
It remains the Fed’s favored inflation gauge, providing the central bank with a complete picture of costs that matters to customers. A higher or lower reading than expected can force the Fed to raise rates more or less. Release of the PCE price Index and end-of-the-quarter window dressing activities by large institutions can lead to another volatile period.
Risks for another stock market breakdown if liquidity suddenly dries up and the banking turmoil resumes. However, news from the Fed and Treasury department to protect and provide insurance for depositors have stabilized the financials (XLF, BKX, KRE, etc.) and large banks (i.e., JPM, BAC, etc.), as evidenced by bullish gap-ups and island reversals on 3/27/23. Nonetheless, the S&P 500 Index (SPX) remains range bound soon after the bearish island reversal day on 3/22/23, coinciding with the last FOMC meeting.
Looking out further, for the past five months (since Nov 2022), SPX has traded within a well-defined range between 3,750-3,800 (support) and 4,100-4,200 (resistance). The convergence of the two key moving averages (50-day ma at 4,013.5 and 200-day ma at 3,931.5) and the sideways trending Bollinger Bands further reaffirm a stock market confined to a predominantly range-bound trading environment.
Also, the VIX Index continues to fluctuate between a wide range between 17-18 (support) and the low-to-mid 30s (resistance) for the past 1-plus year. The 10-year US Treasury yield (TNX) struggles to break out or break down between 3.25-3.5% (support) and 4.1-4.3% (resistance). Same with the 30-year US Treasury yield (TYX) between 3.41-3.53% and 3.99-4.05%. The 10-year minus 3-month yield curve inversion (-1.38) worsens as it records new lower lows.
On a positive note, SPX enters a favorable seasonality period between April and May. For the past 20 years, SPX has recorded average monthly gains of 2.0% during April and 0.2% during May before entering the slower summer months.
Despite the above technical and seasonality conditions, the lack of follow-through to the upside or the downside via a breakout or breakdown warns of SPX remaining stuck between pivotal support and resistance. Any bullish or bearish directional trend changes have yet to occur.
The release of the Core PCE Price Index may or may not be a game changer. Until a confirmed breakout or breakdown, the highest probability for traders is for prices to remain in a choppy trading range market environment between 3,750-3,800 and 4,100-4,200.