The S&P 500 and NASDAQ Are At A Big Turning Point

Structurally, there hasn’t been much change in the stock market this week. The S&P 500 continues to form a rising wedge pattern, which has been developing over the past few weeks. Additionally, volume levels in the S&P 500 futures are declining, a classic signal of a rising wedge pattern nearing its final stages. Moreover, a secondary bump-and-run pattern emerged, further indicating that the recent rally in the S&P 500 may be approaching its end.

The NASDAQ futures display similar technical patterns, with a rising wedge, a bump-and-run formation, and a declining volume profile. These patterns and the drop in volume suggest that the recent upward momentum may be losing steam and could be nearing its conclusion.

Both patterns suggest there may still be some room for the wedges to play out, but they are approaching their apex within the next week or so. This means we could see these patterns break as early as this week.

China

Meanwhile, the much-anticipated China news from this past weekend once again lacked meaningful details. The so-called China stimulus hopes appear to be more of the same—just hope. There were no specific numbers or clear plans to address the ongoing economic struggles. Investing based on hope, without concrete information, is not really investing—and it usually doesn’t end well. As a result, early indications show that the Hong Kong Hang Seng market trading is lower by about 1.4% as of this writing.

Additionally, over the weekend, China released its inflation data, revealing that PPI fell by 2.8% year over year, indicating deflation. Meanwhile, CPI rose by 0.4% year over year—not month over month, but year over year—highlighting that China’s issue is not inflation but deflation.

The harsh reality for China is that it needs to allow its currency to devalue to reintroduce inflation into the economy. However, so far, they seem unwilling to let that happen. There have been opportunities, especially when the U.S. dollar was strengthening significantly, but instead, China has been fixing the yuan at a stronger rate than the prevailing offshore market rate.

We’ll know China is serious about addressing its economic issues when it allows its currency to devalue. Until that happens, it seems like it’s mostly talk, with empty promises aimed at influencing the market without real action behind them.

Financial Conditions

It is interesting to note that the USD/CHF is also exhibiting a bump-and-run pattern, which suggests that the U.S. dollar could continue to strengthen against the Swiss franc. This pattern aligns with the broader trend of dollar strength we’ve been seeing recently.

We pay attention to the USD/CHF because a stronger dollar and weaker Swiss franc have historically been associated with lower prices for stocks like Apple. These two assets tend to move inversely to each other, meaning that when the dollar strengthens against the Swiss franc, Apple’s stock price often declines.

This dynamic is more a reflection of overall dollar strength. It’s a relationship that’s even more noticeable when looking at the EUR/USD, which tends to have a positive correlation with the S&P 500 rather than an inverse one. When the euro strengthens against the dollar, the S&P 500 and other U.S. equities often perform better, highlighting how currency movements can impact stock prices.

The latest move in the EURUSD has not yet been reflected in the S&P 500, and at this point, both have gone in opposite directions.

This is because a stronger dollar typically leads to tighter financial conditions. If the move in long-term rates is sustained, the dollar should continue strengthening. As a result, we could see the resumption of tighter financial conditions—not because the Fed is raising rates, but possibly because the market believes the Fed is making a policy mistake.

-Mike

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