Equities report: So, did the AI bubble burst?

Since our last report, All three major US stock market indexes, Dow Jones, Nasdaq and S&P 500 edged lower in a sign of equity market reservations. The market worries tend to revolve around the outlook of the tech sector, with particular worries being set on Artificial Intelligence. Bank CEO’s have warned for a possible correction lower of US stock markets,  while the scenario of an AI bubble has been whispered among traders for some months now. It should be noted that the doubts expressed by the Fed in its latest interest rate decision for more monetary policy easing were not helpful either as the prospect of tight financial conditions being prolonged in the US economy,  tends to weigh on equities. On a technical level we are to provide a technical analysis of S&P 500’s daily chart for a rounder view, given the index’s broad spectrum. 

AI bubble jitters weigh on US stock markets

To put it mildly the markets seem to be becoming increasingly uneasy with upward trajectory of tech shares, especially the ones directly related with AI. The hit was felt not only in the US, but also Asian stock markets indexes like Nikkei 225, dropped in today’s session. It’s as if the market’s frenzy for AI has reached its first doubts for the prospects of the technology, a period of a possible coming of age. Also big banks issued warnings for overstreched valuations, implying that the markets may be in for a drawdown. Comments by the CEOs of Morgan Stanley and Goldman Sachs intensified market worries for a possible bubble, given the consecutive all time highs the index has reached over time. Please note that S&P 500 since early April has risen almost 40%, in a continuous six month winning streak. Yet we have to state that the warnings are not new, it’s characteristic that JP Morgan Chase’s Jamie Dimon last month, had sounded the alarm bells last month by stating to the BBC that there is a higher risk for a serious fall in US stock markets. US fundamentals may to be able to carry the weight of such a rally and force the index to correct lower. Yet are we about to witness the burst of a bubble with a subsequent crash, or are we talking for a possible correction lower. In our opinion the movement is still to narrow hence, the possibility of a crash, albeit on the horizon, does not seem to be realising at the current stage, at least not yet.

What’s up with the Fed’s QE?

We start the Fed paragraph with its latest interest rate decision. The bank as was widely expected cut rates  by 25 basis points. Yet Fed Chairman Powell in his press conference following the release cast doubts on the necessity of further easing of the bank’s monetary policy in the December meeting. It should be noted that the market’s expectations are still for a rate cut in the bank’s next meeting yet have eased if compared to its expectations before the release. Currently Fed Fund Futures imply a probability of 70% for another rate cut in December yet the nxt cut may have to wait until spring next year. Also another issue that tends to pass under the radar, would be the Fed’s liquidity injection into the banking system of $29.4 billion as reported by various sites. It seems as if the US central bank recognises the tightness of the financial conditions in the US economy yet as inflation in the US economy continues to run at high levels it cannot cut rates extensively. So one solution would be to quietly provide liquidity in the markets yet maintain verbally a more firm stance. We tend to place more weight though on the bank’s interest rate level and its intentions which seem to have a wider impact on the market’s expectations. For the time being, our expectations are for the bank to cut rates in December, yet at the same time we may see the bank taking a long break. Also everything is dependend on the data showing the state of the US employment market and the level of inflation, yet the US government shutdown tends to leave us in the dark or now. Should we see Fed policymakers highlighting their doubts for more easing to come we may see such statements weighing on US stock markets, while should they opt for a more dovish tone, we may see US stock markets getting some support.

Technical analysis

US500 daily chart

• Support: 6760 (S1), 6490 (S2), 6190 (S3).
• Resistance: 7000 (R1), 7250 (R2), 7500 (R3).

Since our last report S&P 500 dropped testing the 6760 (S1) support line. Despite the dsrop of the index’s price action we maintain a bullish outlook for S&P 500 given that the upward trendline guiding it remains intact and treat the drop as a correction lower. We have to note though that the bullish market sentiment has eased if not been erased as the RSI indicator has dropped to th reading of 50, implying a rather indecisive market, which could allow for a stabilisation of the index’s price action. Should the bulls maintain control as we expected, we may see the index, reversing last week’s losses and continuing higher to break the 7000 (R1) resistance line, reaching thus new All Time High levels and forming a higher peak. Should the bears be in charge of the index’s direction, we may see it breaking the 6760 (S1) support line, continuing lower to also break the prementioned upward trendline in a first signal that bullish movement has been interrupted and continue to break also the 6490 (S2) support level, with the next possible target for the bears being st at the 6190 (S3) support base.