This week will be another one of those weeks with a lot of moving parts. Thursday is likely to be the one everyone will be watching. Thursday morning, there will be a US CPI print at 8:30 AM, with the headline y/y forecast to rise by 7.9%. Also, on the same morning will be an ECB monetary policy announcement with a press conference also at 8:30 AM ET.
It will result in currency and rates, moving, and what is worse, it may not be entirely clear at first what the markets are responding to, which will probably result in a great deal of volatility, and a period of digestion to follow.
This means the start of the week is likely to be choppy, especially on Wednesday, if investors are looking to hedge their positions ahead of the significant news events.
With that said, the war in Ukraine is resulting in the dollar index and energy prices surging. Couple that with expectations for a tighter monetary policy, credit spreads are now widening, meaning that overnight funding costs are getting more expensive, which indicates that stress is building beneath the surface.
The FRA-OIS spread, the difference between the 3 Month LIBOR rate and the Fed’s Fund Rate, has widened to 35.25 basis points. That is the highest the spread has reached since the spring of 2020. Typically, when this spread widens, it is associated with a great deal of price pressure on the S&P 500.
If this stress continues to build on Monday, it seems tough to imagine that we will see any meaningful advance in stock prices, especially if the dollar and oil continue to rise. If anything it will probably begin to worry the markets more as the risk for tightening financial conditions and concerns of an economic slowdown start to weigh.
A strong dollar and rising oil prices are the key ingredients needed for an economic downturn, with the potential for an economic recession.
The yield curve has collapsed, with the 10 minus 2 spread falling to 25 bps, and at this point the curve could very well be on its way to just 10 bps, as the risk of a recession elevates.
1. S&P 500
The pattern in the S&P 500 appears to be in a diamond formation and we have seen several of those patterns form over the past few weeks. It was, actually the same pattern that formed on a larger scale in December and January, which helped us identify the significant market top. If the pattern plays out, the S&P 500 will most likely return to the origin, which would be around 4,100.
2. Nasdaq
The NASDAQ futures have a similar half a diamond pattern, which is also on an unstable leg. We shouldn’t have to wait too long to find out if this indeed is the correct call, with the potential for the pattern to break in overnight trading on Sunday, resulting in a drop back towards 13,000 over the course of this week.
3. Advanced Micro Devices
Advanced Micro Devices (NASDAQ:AMD) still looks weak, as the stock trends lower. This seems to be an inflection point for the shares as a long-term downtrend and short-term uptrend converge. AMD may be range bound for a bit longer, but a break of that uptrend around $107 is going to lead to much lower prices potentially below $100, which I think is more likely than not.
4. JPMorgan
The banks look vulnerable here, especially if the yield curve keeps flattening and investors grow more concerned about a recession. JPMorgan Chase & Co (NYSE:JPM) has already fallen below support at $135, and that puts $129.50 in play.
5. Shopify
Shopify (NYSE:SHOP) is also at a critical juncture, as the shares test support around $590. I ultimately do think that level of support breaks and the stock heads to $450.
6. Altria
Finally, I bought Altria Group (NYSE:MO) for my long-term portfolio at the beginning of the year, and to this point it has performed. It appears to have finally broken out of its trading range, with the potential for it rise to around $58.50.
