S&P 500 Hits 200-Day Average After Stretched Run on Low Liquidity, Recession Fears Continue

S&P 500, Nasdaq 100, Dow, Bed Bath and Beyond, Walmart and Treasury Yields Talking Points:

  • The Market Perspective: S&P 500 Bearish Below 4,100; USDJPY Bearish Below 134.00; EURUSD Bullish Above 1.0100
  • Liquidity conditions are adding to distortions beyond the S&P 500’s push to its 200-day SMA, a Bed Bath & Beyond short squeeze and NasdaqDow ratio slip show amplified speculation
  • Growth and recession discussions continue between Walmart earnings, China’s economic troubles and forthcoming data such as the US retail sales figures

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In Thin Liquidity: An S&P 500 Key Tech Test and a Meme Stock Short Squeeze

The thinned liquidity conditions extending the volatility trough of the summer doldrums has prolonged the drift higher in risk appetite. Such a backdrop has helped make for a receptive market for earnings data from the likes of Walmart and even cultivated some speculative charge that harkens back to the height of the meme stock craze days. In the same breath, serious macro concerns seem to be downplayed or interpreted through a more favorable lens. How ‘strong’ is this complacency? We will be putting that question to the test over the coming session as the benchmark S&P 500 finds itself testing more serious technical resistance. The break this past Friday through the midpoint of the 2022 range was an impressive feat, but there is likely a lot more recognition around the presence of the 200-day simple moving average around 4,326. We’ve sheered through that trailing measure a few times this year, but that was under the auspices of high volatility. Activity levels now are materially lower, and that typically bolsters the influence of such barriers – particularly when retail is artificially amplified. With momentum stretched (spot’s run above the 50-day moving average is the highest since early 2020) and net speculative futures positioning pushing a bearish view not seen in a similar time frame, questions will arise.

Chart of S&P 500 with 50 and 200-Day SMAs, Volume, 50-Day Disparity and COT Net Spec (Daily)

Chart Created on Tradingview Platform

As I’ve mentioned a few recently, the market backdrop is playing a critical role in how our markets unfold. The liquidity restrictions that historically stretch through the month of August – but not necessarily with the same level of restraint in volatility – continue to magnify the influence of the retail speculative interests that remain. Point in case is the charge seen in some of the meme stock players that were favorites during the two phases of the peak Wall Street Bets activity – January and June 2021. Instead of the chat room swell for the likes of AMC and GME we’ve seen recently, the big name this past session was Bed Bath & Beyond which charged more than 70 percent intraday on volume that was magnitudes larger than the what is typically seen in daily turnover. This is a not-so-subtle short squeeze, but it is likely isolated so long as there remains a dearth of participation from larger market players.

Chart of Bed Bath and Beyond with 200-Day SMA, Volume and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

What is Driving the Market the Rest of This Week: Speculation or Fundamentals?

As we move into Wednesday’s trading session, it is important to keep track of the market’s depth gauge. If we continue to draft at such a shallow speculative setting, the priorities of the smaller and shorter-duration retail trader will likely shine through. Key in that influence is the appeal of ‘risk’ leaning assets versus ‘value’. However, not all traditional fundamentals are cast to the wind. This past session actually reflected a notable downdraft in the ratio of the Nasdaq 100 to Dow ratio (the growth-to-value measure). That was helped by the strong earnings of a few blue chip companies. Both Walmart and Home Depot managed to best analyst forecasts ($1.77 vs $1.66 expected and $5.05 vs $4.95 expected respectively), but that didn’t mean that their reports were exactly macro friendly. The consumer giant reported that profits did struggle and revenue shifted from large discretionary spending to necessities like groceries and higher income households coming for discounts. That doesn’t bode well economically for the US. Ahead, we have Target and Lowe’s reporting which will offer a similar consumer spending, inflation and housing insight mix.

Chart of the Nasdaq 100 to Dow Jones Industrial Average Ratio (Daily)

Chart Created on Tradingview Platform

It is interesting that there is more attention paid to the corporate updates that we are getting this week than we are the official macro data. Earnings can have a forward guidance component which is indeed useful, but there is a far more comprehensive picture that comes from the economic docket. What’s on that docket is not exactly favorable. This past session, US housing starts data showed a -9.6 percent drop in July which seems to reinforce the ‘housing recession’ warning from the NAHB the day before. If US consumer spending in the retail sales figures due later today follow a similar path, it will be important to see if the market starts to register its fear of a recession (seen in the 2-10 spread) translating to reality. What’s more, it is worth seeing the market’s general confidence level with the backdrop of the fresh US stimulus after President Biden signed into law the US climate, healthcare, tax bill expected to top $430 billion.

Chart of the US 10-Year to 2-Year Yield Spread Overlaid with the NAHB Housing Market Index (Weekly)

Chart Created on Tradingview Platform

Specifics to Watch in ‘Recession’ and ‘Rate’ Paths

Looking out over the coming docket, there are listings that can absolutely stir the markets to life via the two dominant macro themes – so long as traders are willing to listen. On the economic health side, the retail sales figure from the US is top listing, but Eurozone 2Q employment is an important update itself. It’s worth digesting. In an environment of skepticism around fundamentally-driven trends, it is worth noting that next week holds some more provocative and significant fundamental events in the form of the August PMIs for the developed world an the ever-popular Jackson Hole Economic Symposium. Will we sort our conviction until then?

Global Calendar of Top Macro Economic Event Risk for the Next 48 Hours

Calendar Created by John Kicklighter

The other theme of persistent merit that will draw our attention Wednesday is monetary policy’s tempo. The RBNZ rate decision met expectations with a 50 bp rate hike to 3.00 percent which would cement the country’s debt and currency as the top yielding player among its major counterparts. That said, is there enough yield premium here to really override skepticism in risk appetite. The New Zealand central bank decision isn’t the only monetary policy-related event to take in. Following Canada’s update on consumer inflation, the country’s upstream price gauges are on tap today. Further, the UK will release its run of inflation on its key levels for the month of July as well. I will even keep tabs on the FOMC meeting minutes, but the likelihood that they materially clarify the Fed’s intentions for a 50 or 75 bp rate hike come September 21st preemptively is fairly low in my book.

Chart of Relative Monetary Policy Standing with Swaps Forecast of Year-End Benchmark Rate

Chart Created by John Kicklighter

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