The The S&P 500 (NYSEARCA: SPY) Down to 2022 (-17.67%), we are heading for a year-end rebalancing. Technically, SPY is back in correction territory NASDAQ (NASDAQ: QQQ ) The low (-29%) is still in a bear market. The Dow Jones (NYSEARCA: DIA ) The index has only outperformed (-8.2%) year-on-year. SPY has reached a low of $348.11 made on October 13, 2022. It actually dropped 17.77% off its lows and reached a high of $410 on December 1, 2022.
As investors engage in tax-loss harvesting strategies, it’s important to look at what to expect from the S&P 500 in 2023 from a fundamental and technical perspective. Some of the key catalysts this year include inflation, US Federal Reserve (Fed) monetary policy, 10-year Treasury yields, a rising US dollar, energy prices, the Russia-Ukraine conflict and China’s Zero-Covid Restrictions.
Inflation and Jobs
Aggressive rate hikes by the central bank are beginning to have an impact on inflation. Headline inflation rose to 9.1% in June and is on a downward trend in October CBI fell to 7.7%. Markets believe that the Fed will not only reduce rate hikes, but actually move toward rate cuts in 2023.
With inflation heading in the right direction, the next shoe to drop is the job market. However, the last two jobs numbers came in above expectations of 263,000 and 200,000. In fact, the October jobs data was revised to 284,000 from 262,000 against expectations of 200,000. The unemployment rate managed to increase slightly from 3.5% to 3.7% in September 2022. Inflation is still far from the central bank’s inflation target of 2%.
FOMC in 2023
Chairman Powell will now make aggressive rate hikes so they can manage rate cuts instead of getting behind the curve with wimpy rate hikes that fail to have an impact on inflation. Indeed, the Fed has raised rates by 75 basis points for four consecutive meetings, leading to a hike of 4.00% at the final FOMC meeting of the year on December 13, 2022.
Chairman Powell has said that small rate hikes are likely in the long run to keep inflation on a downward path. The next FOMC meeting will conclude on February 1, 2023 with a rate decision and press conference.
A mild 2023 recession
The setbacks are only visible in the rearview mirror. U.S. gross domestic product hit a recession in 2022, marking two consecutive quarters of GDP declines, but many analysts are calling for a recession in 2023. Inverted yield curve Predicting lags of months to a year suggests this is possible.
The 10-year Treasury yield peaked at 4.335% on October 21, 2022, and fell to 3.584% on December 9, 2022 as it tried to move higher.
It moves inversely with SPY most of the time. The US dollar index also moves inversely with the SPY. It rose to $114.68 on September 28, 2022. It dropped to $104.58 on December 9, 2022. It also seems to be trying to move forward. Using the paths of Treasury bond yields and the US dollar index can provide a reference point for the SPY’s inverse path.
China and Russia
China’s strict stance on its zero-covid policy, which has kept the country in check for three years, has taken a surprising reversal as it continues to ease restrictions. Reopening its economies could also lend itself to improving supply chains to reduce logistics costs. Meanwhile, the Russia-Ukraine conflict shows no real sign of abating.
If the two countries reach an agreement in 2023, it could help spur further fuel and commodity price declines. Both of these events are positive catalysts for SPY in 2023.
Monthly downtrend channel
SPY is in a monthly downtrend channel from its January 4, 2022 high of $479.98. By drawing parallel lines connecting the highs, you can find a solid monthly downtrend line. The line has been tested and rejected four times this year.
Each rejection except December 2022 resulted in a lower low before bouncing back to retest the lower high. This is the very definition of a downtrend that includes lower highs and lower lows. The monthly stochastic completed its full swing below the 90-band in January 2022, and is below the crossover back-up from the 20-band in October 2022. Dec. 1, 2022 the monthly downtrend line was retested at $410.00.
However, the SPY rejected another breakout attempt as it dropped below the monthly 50-period moving average (MA) of $401.25. The question arises as to whether this rejection will set up another move lower near the $339 lower trendline level or a shallow pullback that will try to break out through the lower line once again in 2023.
The downtrend line is below $410.00, but a true monthly market structure low (MSL) trigger would require a breakout through the $431.73 level. The monthly stochastic bounce stalled around the 30-band during the mini-pub attempt to form a pub breakout above the $410.00 level or break down through the 20-band and form a mini-pub breakout below the monthly 20-period MA. At $358.20.
The current Bollinger Bands upper and lower envelope range has narrowed to $410.00 and $385.64 respectively. A contraction precedes an extension, as prices either extend lower or higher again. Weekly MSL trigger support is at $375.45 and monthly MSL trigger is at $431.73. The Bulls need two positions to break the 2023 slump.
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