• S&P 500 recovers from recent losses on Tuesday.
  • SPY is now on hold until the imminent US CPI report.
  • Investors are hoping for a relief rally in US equities.

Tuesday saw some relief finally for equity investors as the market paused for breadth and attempted to recover some lost ground. This was always likely to happen with the release of Wednesday’s CPI report being the highlight of the week. US yields also gave up some ground as increasing recession fears led to a slight downgrading of potential interest rates. The interest rate sensitive real estate sector was Tuesday’s worst performer. XLRE lost over 2%, while energy (XLE) recovered from Monday’s pummeling. Oil prices are spiking higher again this morning.

S&P 500 (SPY) News

It really is all about the US CPI number on Wednesday. That will set the tone for the remainder of the week and perhaps longer now that earnings season is over. It determines how bond markets will trade, which is currently the main factor influencing equity performance. US CPI is expected to come in at 8.1%, with the core number expected to reach 6%. Anything in line or even slightly better should see an immediate relief rally before a likely pause for reassessment.

From our analysis, it appears investors are looking for an excuse to step back into the market and go long equities. So perhaps there is yet more to flush out before we get our long-awaited rally. It is clear that positioning and sentiment are overly bearish, and that does often lead to sharp rallies. The market is perhaps set up for one. Traders are increasingly realizing just what it means to no longer have the Fed support the market with unlimited money. The financial conditions index published by the Chicago Federal Reserve is showing a spike to March 2020 levels. 

Chicago Fed National Financial Conditions Index

This would also be reflected in bond yields and particularly the spread between junk bonds and US treasuries. The higher the spread, the tighter credit will become. Tighter credit means less profitable companies will struggle for financing. Finance is needed for investment and growth. That is why growth companies are being hammered this year. Funding is drying up.

S&P 500 (SPY) Forecast

Tuesday did start off poorly with the SPY managing to set a lower low than Monday’s meltdown, but this was quickly rebuffed. The index mostly treaded water for the remainder of the session. The SPY bottomed out at $394, still short of our $390 target and potential bounce level. We still have a potential bullish divergence from the Relative Strength Index (RSI) with it not setting matching lows. We have had multiple 90%-plus down days though, and these tend to group reasonably close together, indicating another capitulation day may not be far away. If the SPY can get above $415, that puts it on for a move to $447. Even if CPI is promising, if the SPY fails to break $415 this week, then we will likely see another capitulation day down to $390.

SPY chart, daily