Break below 3800/3760 to trigger a decline toward last October low of 3490 – SocGen

The S&P 500 index has been on a roller coaster ride, testing new highs and lows since the start of 2021. The index hit a high of 4,238 in early May, but subsequently experienced a downtrend, falling as low as 3,644 in May as inflation concerns and rising interest rates made investors cautious.

However, the index saw a strong recovery in June, fueled by a dovish announcement from the Federal Reserve and solid earnings reports from major companies. As of mid-June, the S&P 500 had broken out above the highs of last September/December, but the move petered out after facing interim resistance near 4,195.

According to analysts at Société Générale, the S&P 500 must surpass 4,000 to affirm an extended up move. The low of December near 3,800/3,760, which is also the 61.8% retracement from October, is a crucial support zone.

“A bounce is expected, but the index must re-establish itself beyond the 50-day moving average (now at 4,000) to affirm an extended up move,” the analysts said. If the index establishes itself below 3,800/3,760, a deeper down move is not ruled out. Next potential objectives could be at 3,630 and last October’s low of 3,490.

It is essential to note that the S&P 500 is not the only index that has been experiencing a roller coaster. Global stock markets have been volatile due to concerns about COVID-19, uncertainty surrounding government policies, and rising inflation. Investors have also been closely monitoring the pace of economic growth and corporate earnings reports for cues on the direction of global equities.

US equities had a decent start to the year, with the S&P 500 rising roughly 5% in January, its best start to a year since 1987. However, February saw a sharp correction, with the index falling by more than 6%.

The market’s swift correction was fueled by concerns of rising bond yields and inflation, which could prompt the Federal Reserve to tighten monetary policy sooner than expected.

The correction was short-lived, though, as the market bounced back with renewed vigor, with the S&P 500 returning to its previous highs by April.

However, inflation fears returned in May, putting pressure on the markets once again. The Fed’s hawkish commentary also added to the uncertainty, with some analysts predicting a faster-than-expected rate hike.

The S&P 500’s June recovery appears to have been fueled by a combination of factors. Firstly, the Fed’s announcement in mid-June that it would maintain its accommodative policy for the time being was received positively. Investors interpreted the move as a sign that the Fed was not yet ready to tighten monetary policy.

Secondly, corporate earnings reports for Q1 and Q2 of 2021 have been impressive, indicating that the US economic recovery is on track. According to FactSet, the blended earnings growth rate for the S&P 500 for Q2 2021 is 61.1%, the highest since Q4 2009. Furthermore, 78% of companies that have reported earnings thus far have exceeded analysts’ expectations, further reinforcing positive sentiment.

Despite the recent volatility, most analysts are optimistic about the S&P 500’s near-term future. The index’s strong fundamentals, the Fed’s dovish stance, and solid earnings reports are expected to keep driving the index higher. Additionally, the US economy’s recovery is expected to pick up steam in the coming months, fueling further optimism.

However, it is essential to keep an eye on inflationary pressures and the pace of economic growth, as these factors could throw a wrench in the market’s trajectory. The Fed’s outlook on inflation and interest rates will also be critical to watch, as any indication of tightening monetary policy could cause market volatility.

In conclusion, the S&P 500 index has experienced a turbulent year so far, with several ups and downs. However, the index appears to be on an upswing once again, driven by solid earnings reports and the Fed’s accommodative stance. While there are risks to the market’s trajectory, most analysts remain optimistic about the S&P 500’s near-term prospects. Investors should continue to monitor the market’s fundamentals and watch for any signs of a change in the Fed’s monetary policy.


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