After five straight days of losses for the S&P 500, conditions favor some sort of oversold bounce. Several catalysts are looming, and market participants will likely start anticipating a reaction to PPI, CPI, and the next Fed interest-rate decision.
The S&P 500 holds some important support at 3920 but is in a precarious position and could easily fall to its 50-day simple moving average at 3830 if the upcoming news flow scares the market.
What has been most notable about the action during this five-day selloff is how the market narrative has been shifting from concerns about consumer inflation to concerns about employment-related inflation and the potential for a recession. The primary worry is that the Fed will not be able to slow the hot jobs market without also killing the economy.
The upcoming PPI and CPI reports likely will confirm that we have seen peak consumer inflation, but that has been anticipated for a while and is no longer the driving force for movement that it once was. In fact, if consumer inflation is cooling fast, it may create more worries about a looming recession.
The short-term market setup favors some upside simply because we have oversold technical conditions. There is a greater chance that the PPI and CPI reports will be viewed as positive when they come in the context of an oversold market. The actual numbers became less important when there was a favorable technical setup. However, if the number deviates substantially from expectations, then that will change the dynamics. Currently, the best bet is that PPI and CPI will produce a favorable market reaction.
Unfortunately, this action is all short-term and doesn't change the fact that we are still buried in a bear market. There is still some hope for positive action by the end of the year, but it will depend largely on what the Fed says next week.
My game plan is to continue to look for very short-term trades and not to be in any rush to build longer-term positions. This is a market that favors trading volatility over picking stocks.
We have a slightly positive open on the way but no major news until Friday.