Fed Sparks a Massive Rally

Stocks surged aggressively last week as investor bets rose that rates have peaked in the aftermath of the FOMC’s decision to leave rates unchanged. Moreover, the labor market data cooled, signaling the Fed is done hiking. The S&P 500 (SPX) added 5.9% to mark its best week of the year. Dow Jones Industrial Average (DJI) rose 5.1% while the tech-heavy Nasdaq Composite Index (IXIC) jumped 6.6%.

Earnings and Fed Dominance

On the earnings front, about 80% of the S&P 500 companies have reported so far. Earnings have come better than expected, although forward guidance has been underwhelming. However, earnings took backstage as Fed stole the show.

The S&P 500 reversed its breakdown at 4,200 last week, indicating bears lacked conviction attempting to sell the market on a signal to do so. Evidence of downside fatigue coupled with bull market pessimism leads us to see the turn as a resumption of the S&P’s uptrend. An opportunity for contrarian investors.

Dovish Turn and Market Optimism

The FOMC held steady, shrugging off strong data on the pretext of tightened financial conditions. The Fed pause got interpreted by short term investors as a knee-jerk positive for equities after some considerable derisking that took place in the past months.

But this dovish turn may backfire with financial conditions easing temporarily amid some softer data. However upward spikes in inflation will force another hike. Bond yields are unlikely in the process of peaking during Q4 and that one should not go long duration yet.

Market Technicals

Last week, the Russell 2000 index witnessed a low support test and emerged with a probable test of the 200-day MA. The Nasdaq, on the other hand, was the best positioned of the indexes from a bullish standpoint, leveraging this advantage by generating its own “bear trap”. It’s trading above its 50-day and 200-day MA. The Dow Jones(DJI) bounced back from around 32,650 close to a weekly double bottom it made the previous week around 32,300. S&P 500 rose more than 5% to what is becoming a very important level of resistance at 4,375.

Where the indices go this week tells a lot about the structure of the last week’s move. So there are two options here: the index needs to gap higher and take out respective resistance levels. If they fail to do so, they will surely retrace to an altogether new low.


In the context of Israel Hamas conflict, equities will soon revert back to an unattractive risk-reward into year end. In the near term, we expect equity markets to remain choppy and range bound with a moderate upside. Areas that have underperformed this year, including emerging market equities may have a catch-up Santa rally.

Having said that, even if markets shift sideways from here it is still a positive. If things stabilize in the Middle East, it will provide bulls with lots of fundamentals to work upon. Soft data will keep the bulls skeptical of either extreme in the current trading range. Bad economic data doesn’t encourage stocks to trade near their highs.

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