Don’t Get Caught Offside In S&P 500

Consolidation

The S&P 500 was in a consolidation phase last week with an eye, clearly, on the 2 April tariffs that are rapidly approaching.

The Federal Reserve announced that it had effectively ended the period of Quantitative Tightening (QT); however, the response from the markets was surprisingly muted.

The U.S. dollar was also in a consolidation phase last week. There are increasing signals that dollar outflows are growing, leading to a paradigm shift.

Dollar Weakness

Investors traditionally expect the S&P 500 to perform well in periods of dollar weakness. However, if it’s to recover, it will likely require a strengthening dollar.

A key element of the new regime is that the dollar is no longer King. It remains the reserve currency. However, the process of repatriation or de-dollarisation in parts of Asia and Europe continues. That is reflected in the outperformance of global stock markets relative to the U.S.

The Trump administration wants a weaker dollar. However, a weakening dollar will make it more difficult to sell debt, and investors will demand a higher interest rate to buy 10-year and 30-year treasuries.

The American consumer is also showing signs of financial stress and beginning to retrench due to weakening financial and increasing debt positions. This is not a good sign for the economy.

The recent period of American exceptionalism appears to have ended.

S&P 500 Key Levels:

The S&P 500 opens in positive gamma today.

Last week, the gamma flip zone moved up slightly to 5667, call resistance remained at 5777 and put support moved marginally lower to 5485.

In last week’s post, we indicated that the S&P 500 had to break through and close above the previous gamma flip zone level at 5655 to confirm that the previous week’s low was the low. It did that.

That said, the S&P 500 experienced significant resistance at the 5700 level.

Given the uncertainty surrounding the April tariffs, predicting the direction of the S&P 500 this week is challenging. It could go either way.

Our instinct, based purely on probabilities, is that there will likely rally into the end of the month and break through the call resistance level of 5777. It could go as high as 5800.

However, that may be followed by a correction that will extend beyond the low at 5500. Our view is that the correction will be met by fiscal and monetary stimulus supporting upward momentum in the 2nd quarter.

Our view remains that the market will likely pull back further and potentially deeper in the second half of the year.