S&P 500 Taking A Breather

S&P 500 Weakens After A Robust Start

The S&P 500 had a robust start to last week; however, it experienced some weakness on Thursday and Friday.

The main economic data released last week, including CPI, PPI, and retail sales, were broadly positive and suggested that inflation from tariffs was limited during the reporting period.

We noted in our previous post that the impact of tariffs more often emerges four to six months after their implementation.

In part, that is determined by the inventory held by retailers. There is some evidence that retailers purchased additional inventory in advance of the tariffs being applied.

Household furnishings and appliances experienced an uptick in inflation, and these are areas where building inventory is more challenging for retailers.

At this point, the S&P 500 remains bullish, exhibiting upward momentum.

That said, there are early signs that, from an earnings perspective, the market is priced to perfection.

Stocks have rallied strongly since the Liberation Day correction, and strong earnings, falling short of exceptional, are not a guarantee that the stock price will increase.

There is also evidence of increased darkpool activity. What is unclear is the direction this activity will take the markets.

On the flip side, CTAs are trailing the retail-driven rally and would need to double their exposure to equities to catch up.

While the third quarter is typically weak seasonally, the lack of CTA and Hedge Fund exposure could lead to buy-the-dip rallies.

On balance, this third quarter should be approached with caution. Taking some profit and building a cash position to deploy in corrections may be a sound defensive move.

Key Levels

The S&P 500 opens in positive gamma today.

The gamma flip zone has moved up and sits at 6160; the call resistance level is 6296, and the put support level is 6048.

The S&P 500 is trading at the upper end of a range that has been forming over the last couple of weeks. Expect the 6300 level to offer resistance.

Earnings, particularly net income and operating margins, will provide insight into the impact of tariffs at the corporate level and could determine the direction of the market.

Anticipate some volatility and digestion at the current levels. The weight of probability is momentum to the upside, and expect any pullbacks to be shallow and bought.