Low For The S&P 500?

Recently, the equity markets have settled into a track where bad economic data has been good for prices. Obviously, that focus is directly related to assumptions that evidence of softening in the economy will unnerve the Fed and prompt them to moderate their inflation-fighting actions.

The importance of the ebb and flow of rate hike expectations should not be underestimated, as a sprinkling of soft US data resulted in a 248-point rally in the S&P and 1,830 points in the Dow off mere hopes of an end to jumbo rate hikes. However, with US jobs holding up for another month, fears that the Fed will overtighten and send the economy into a recession have moderated, and this should remove a portion of downside volatility in equity prices.

Upcoming US PPI and CPI data will bring fresh opinions on where the Fed is headed, but month-over-month measures seem to have settled down significantly, and while the Fed will not be easily put off from future hikes, weak price measures should soothe investors and perhaps set the stage for a sustainable low in the equity markets in the coming weeks.

Keep in mind, the equity markets are forward-looking and are supposedly pricing in widely accepted market expectations. Therefore, stocks are likely to be the first to react to a perceived beginning of the end of jumbo hikes. The markets appear to have also priced in continued, modest hikes until the Fed fund rate reaches a target that is 150 points above current levels.

Even technical signals suggest a low is close at hand, with the most recent Commitments of Trader report showing speculative traders were holding some of their largest net short positions in the E-mini S&P of the past 10 years. Again, we view the stock market as a forward-looking animal, and the massive spec and fund net short seems to be excessively negative.

If the takeaway from upcoming inflation data is that inflation has not been tamed, we would expect to see the S&P make new lows for the year. On the other hand, if PPI or CPI post soft readings for a third month in a row, we would expect a massive relief rally likely to outdo the rallies from the beginning of October.

e-mini S&P 500 - COT - Futures & Options

Originally Published October 7, 2022

Disclosure: The Hightower Report

This report includes information from sources believed to be reliable, but no independent verification has been made, and we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction involving the purchase or sale of a futures contract and/or commodity option thereon. The risk of loss in trading futures contracts or commodity options can be substantial, and investors should carefully consider the inherent risks of such an investment in light of their financial condition. Any reproduction or retransmission of this report without the expressed written consent of The Hightower Report is strictly prohibited. The data contained herein is subject to revision; independent verification is recommended. Any third party opinions regarding this report are not necessarily those of the authors. Due to the volatile nature of futures and options markets, the information contained herein may be outdated upon its release.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from The Hightower Report and is being posted with its permission. The views expressed in this material are solely those of the author and/or The Hightower Report and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.