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War, Peace, or Stalemate?

The tense standoff with Russia over Ukraine is nearing a critical phase as events in the coming days or weeks ahead can threaten European stability and future East-West relations.


On another note, the U.S. inflation rate continues to soar sharply higher. The latest Consumer Price Index (CPI) shows that prices rose in January to 7.5% or at the fastest pace in 40-years (to 1982) with few signs of inflation abating.


The Federal Reserve also finds itself in a challenging situation from a timing perspective, regarding inflation, a slowing U.S. economy, as evidenced by the latest Michigan consumer data delivering the lowest readings since 2011, and now rising geopolitical tensions.


In recent days Fed may have been jawboning stocks down in hopes that when the central bank raises rates in March, it will not have to do so at such an aggressive pace. The Fed believes the recent corrections in stocks can help slow down inflation. Note that the central bank has played this card several times before, including from 2003 to 2005. Will Fed be successful this time?


There are three possible paths for the S&P 500 Index this year:


Path 1: Inflation remains stubbornly high, prompting the Fed to raise rates faster and more aggressively than the market’s expectations. The result will be an SPX decline toward 3,815-3,991, coinciding with the 38.2% retracement from the Mar 2020-Jan 2022 rally and the extension of 2018-2020 broadening top trendline. From peak to trough, the decline would place SPX firmly within the confines of a deep correction of 17% to 21%.


Path 2: Inflation recedes and is transitional rather than permanent, resulting in the Fed tightening less than expected. The bullish action solidifies the 1/24/22 low at 4,222.62 as the mid-term election year cycle low. SPX breaks out above its 1/4/22 all-time high at 4,818.62, confirming the next 596-point move to an optimistic target at 5,415 later in the year. Based on the current closing SPX price of 4,401.67, this would be an impressive 23% rally.


Path 3: The Fed makes a policy mistake. Russia invades Ukraine. U.S. economy slips into a recession. Any or all of the above scenarios can trigger a bearish market outcome as SPX violates the neckline to a head and shoulders top pattern at 4,222.62. The breakdown can result in an SPX decline to 3,485-3,627, coinciding with the 50% retracement from Mar 2020-Jan 2022 rally, 40-month moving average, and the head and shoulders top breakdown target (25% to 27.5% bear decline).


Head and shoulders top pattern also developed from March 2007 to Jan 2008, leading to the SPX bear market.


Under a worst-case scenario, if SPX violates its 50% retracement and the 40-month ma below 3,485-3,505 then the index can plummet to 3,195-3,209.5 or the Sept 2020 low and the 61.8% retracement (33% to 34% bear decline).


The last few weeks have reminded investors and traders that stocks can be volatile and sometimes very volatile. There are a lot of headwinds, including geopolitical, economic, and monetary uncertainties. Investors remain nervous about another stock market crash of the size and magnitude of 2007-2009 and 2000-2002.


The markets remain fluid and will likely change day-to-day and week-to-week. SPX Index is nearing another inflection point as it retests neckline support and its 1/24/22 reaction low at 4,222.62.


Trying to determine the next Fed policy move, or decide if inflation is indeed accelerating, or if Russia will invade Ukraine is fraught with danger.


Monitor the SPX Index closely in the days and weeks ahead as something big is about to occur. After all, SPX is an excellent leading indicator and prognosticator of the future direction of the U.S. economy, interest rates, geopolitical trends, and a gauge on the collective expectations of all investors, including those that are bullish, bearish, and neutral.


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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