Key Points
- Markets get AI jitters.
- Is political uncertainty the driver here?
- Core PCE inflation looms.
- S&P 500 ready to bounce?
Markets Get AI Jitters
The largest hiking cycle in four decades, the fallout from a global pandemic, skyrocketing inflation, talks of recession, and wars, yet the stock market has been surging in the last couple of years; why? Artificial Intelligence. It has been the talk of the town, and tech stocks have been booming.
However, over the last couple of weeks, the markets have been getting “jittery.” In two weeks, the S&P500 has shredded 5% and the NASDAQ100 9.5%, led by losses in Alphabet and Tesla stocks. Both mega-cap companies released earnings reports this week and failed to impress investors despite beating on most fronts. This poses the debate of whether only perfection will do or if it is all an overreaction.
Is Political Uncertainty The Driver Here?
It was announced this week that current US President Joe Biden would be stepping down in the presidential election race and that Kamala Harris would be stepping up in his place. This has swung the polls back towards more of a 50/50, and this hasn’t helped the markets.
Add to the mix the assassination attempt of Donald Trump, and there is a lot of uncertainty right now in the US. It is all proving too much for the markets to handle, and one thing is for sure: markets do not respond well to uncertainty. It is just as likely that this is the reason for the current sell-off because the mega-cap companies still look in great shape.
Core PCE Inflations Looms
The Federal Reserve’s primary gauge of inflation, the Core PCE Price Index, will be released today. According to the CME Fed Watch tool, the markets are pricing in at least two interest rate cuts by the end of the year despite a resiliently hawkish Jerome Powell.
With US GDP coming in very strong yesterday, if Core PCE shows robustness, then this is perfect ammunition for the Federal Reserve to remain hawkish. If this is the case, watch out for another spike lower in the S&P 500.
S&P 500 Ready To Bounce?
When the markets start to sell off, as they have, and volatility undoubtedly rises, it is important for traders to take a step back and look at the bigger picture. The chart below tells us that the S&P500’s bullish structure is still intact, and there is no need to panic. The bearish RSI divergence move was a sign of a market overextended to the upside.
The daily trend line from October 2023 is evidence of that bullish structure, albeit yesterday’s closure was right on it. However, this could now be used as support, and we are already seeing a reaction today. If the S&P500 can close today above the trendline, then we could see a move higher to the Fair Value Gap (FVG) at 5550 next week. However, a close below this trend line could spell more short-term pain for the S&P500.
Risk Disclosure: The information provided in this article is not intended to give financial advice, recommend investments, guarantee profits, or shield you from losses. Our content is only for informational purposes and to help you understand the risks and complexity of these markets by providing objective analysis. Before trading, carefully consider your experience, financial goals, and risk tolerance. Trading involves significant potential for financial loss and isn't suitable for everyone.
