S&P 500 Into Correction Territory?

S&P 500 In Transition Phase

Despite the positive rally on Friday, the S&P 500 is on a downward trajectory toward correction territory.

The Trump administration has signalled that the artificially inflated economy and stock market of the Biden era needs to be corrected.

Last week, Treasury Secretary Scott Bessent provided the most unambiguous indication to date that the Trump administration may have the fortitude to sacrifice short-term economic and financial market pain for long-term gain.

This outcome is not factored into earnings expectations.

The Economic Transition

Transitioning from a buoyant K-shaped economy propped up by excessive government spending to an E-shaped economy that shifts the burden of economic output to the private sector is a promising shift in economic focus, with potential long-term benefits.

That transition, however, will require an adjustment period for both the economy and asset allocation in the markets.

While this transition may bring a period of uncertainty and challenge for investors, it’s crucial to remember the value of patience and long-term thinking. Institutional and retail investors will need to adjust their strategies to trade the historical distribution of probable economic outcomes tied to the Trump administration.

Prepare For Uncertainty

It’s important for investors to acknowledge that there are unknown factors in the market. Investors will not know what they don’t know. Being prepared for this uncertainty and staying alert to potential changes is key to navigating the current financial landscape.

A further downward correction in the markets is likely and more than what is currently priced.

The February Nonfarm Payroll report was broadly positive. Ten thousand government jobs were lost in the month, less than the market anticipated.

That said, it may be the penultimate jobs report that aligns with the American exceptionalism narrative.

After the Nonfarm Payroll report, Fed Chair Powell indicated that the Fed was in no hurry to adjust its policy stance.

S&P 500 Key Levels

The S&P 500 opens Monday in negative gamma.

Last week, the gamma flip zone moved down to 5855, call resistance moved to 5950 and put support to 5730.

Ideally, bulls need to break through the 5811 level on Monday. That was the high on Thursday.

For the week, the 5980 is a key level of resistance that bulls must break. The S&P 500 may have further upward momentum if they can do that.

If bulls fail to break the 5811 level, expect choppy price action and a move lower.

CPI and PPI reports this week (Wednesday and Thursday) will likely add to volatility.