Equity indices have been under pressure ever since the beginning of 2022. Near-term rallies have consistently floundered as renewed selling pressure has pulled markets lower. Lower highs and lower lows have been a feature across major markets. The latest technical rally on Wall Street is now into its seventh day of recovery. Fed Chair Powell’s Congressional testimony and a drop in inflation expectations have fuelled the recovery, as has a higher oil price. However, this could also be a factor that brings about the next decline too.  

  • Markets take “bad news is good” from Powell’s Congressional testimony
  • A drop in inflation expectations reverses some of the negative impacts of the Michigan Sentiment data
  • Will higher oil prices fuel inflationary fears once more? If they do, the rally will once more be short-lived.
  • The Wall Street rallies have lasted between 6 to 11 days in 2022 before selling pressure has resumed.

Powell focuses on fighting inflation and preventing a recession 

Markets have been focusing on the need for high inflation to be brought under control. The Fed is raising the Fed Funds interest rate aggressively (with a +75bps hike in June). However, in his Congressional testimony last week, Fed Chair Powell said that a recession was “certainly a possibility”. He added that:

“we are not trying to provoke, and I don’t think we will need to provoke, a recession”

This is important as it implies to financial markets that an overly aggressive policy approach will be avoided. The potential for fewer rate hikes pulled US Treasury yields lower and has given equity indices a well-needed boost.

Lower inflation expectations have also helped

Another boost to markets has been seen on the other side of the Fed’s mandate, with inflation. Consumer inflation expectations moderated (only slightly) in the recent Michigan Sentiment survey. Final June expectations for 12-month inflation dropped to 5.3% (from 5.4% in the prelim survey). This helped to kick Wall Street sharply higher on Friday.

Rising yields need to be watched

However, there could be a fly in the ointment. US Treasury yields are rising again, and with that real yields are also increasing. This is a near 3-month trend higher which is coinciding with the negative trends in equity markets.

Rising yield chart

The recent move back higher on real yields should serve as something of a warning for bulls of indices. The move higher on bond yields has come as the oil price has started to move higher once more. Higher oil prices fuel inflationary fears and will often drive selling pressure on bonds (i.e. higher yields) and this will ultimately feed into selling pressure on indices.

A near-term rally on Wall Street, but for how long?

Looking at the rebound on Wall Street, the move higher already looks to be towards the levels where previous rallies have faltered. 

The S&P 500 futures (SP500ft) have seen three serious near-term rebounds in the 2022 bear market (also known as bear market rallies). These have lasted between six and eleven days before the selling pressure has resumed. The latest (fourth) rally is now into its seventh day. The last 36 hours of trading have seen the bulls starting to meet resistance. This is coming as the daily RSI has unwound back towards 50. Aside from the late March rally, all the bear market rallies have faltered between 50/55 on the RSI. 

S&P 500 chart

The market has filled the gap at 3876/3985 (which is encouraging for the bulls) but this needs to now become a basis of support. If this support is broken then the selling pressure could begin to develop once more.

Equity market bulls will however be casting a concerning eye on the tech-heavy NASDAQ. The NASDAQ tends to lead the S&P 500 in recoveries. However, higher yields are negative for growth stocks (the NASDAQ is jam-packed with growth stocks). As such the NASDAQ is starting to fall back.

A rally on the NASDAQ 100 futures (NAS100ft) shows a market having recovered to find resistance at a 3-month downtrend. The RSI is faltering at 50 and the market is falling away for a second day (admittedly early in the session). A move back below 11,770 support would hasten the downside momentum. Perhaps then, the 11,070 June comes back into play too.

NASDAQ 100 chart