S&P500 easy money gone - what happens next ?

A quiet start to the new trading week as U.S stock markets closed mixed ahead of this week's FOMC and Q2 GDP data and earnings reports from U.S Mega Tech companies.

The run of softer-than-expected leading data, including the global flash PMI’s, has raised the odds of recession from 33% to 40%. However, in the latest episode of where “bad economic news is good news”, evidence of a sharp loss of economic momentum has flowed through into lower interest rates and inflationary expectations.

This combination has helped the S&P500 to all but reach the 4050 level we have been targeting since late June here. The "easy money" from the rally from June lows is now gone and raises the question of what happens next?

The first thing to note is that volatility will likely rise in the coming days, and following the FOMC meeting, Q2 GDP will be released later that day. The market is looking for a modest rise in Q2 GDP of 0.5%. However, the partial data has been soft, and a second consecutive negative GDP print is possible, which fits one of the technical criteria used to define a recession.

Another point to note is that the initial post-FOMC reaction is frequently reversed in the very next session. The reversal could result from positioning heading into the FOMC or investors having more time to review the nuances of the accompanying messaging.

Presuming the initial reaction for U.S stock markets is for a relief rally after the FOMC, a sell-off may well follow, particularly if the Fed remains hawkish and fails to acknowledge the slowdown in data which would inflame recessionary fears. Further to this point, the bellwether U.S equity market the S&P500 is now well off its June lows, and there is room to move to the downside.

On the other hand, should a more dovish messaging come out of the FOMC meeting, it would be a significant development and likely the catalyst for a more substantial rally - one that I suspect investors would be quick to embrace.

Turning to the charts, the rally from the June 3639 low continues to appear corrective or countertrend. Providing the S&P500 does not extend above resistance at 4200/20, the downtrend is expected to resume.

Source Tradingview. The figures stated are as of July 25th, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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