S&P 500 outlook: Looming recession threatens to stall recent strong recovery rally

S&P 500

The S&P index is consolidating under new 10-week high (4095) hit earlier today, in extension of Wednesday’s 3.3% rally, powered by comments from Fed Chair Powell about easing the pace of tightening in coming months.

The index remains at the front foot following the second consecutive month of gains (up nearly 14% in Oct-Nov), but recovery of the fall in first nine months of 2022, when risk sentiment was battered strong increase of interest rates, is unlikely to see stronger extension, as looming recession would sour the sentiment.

Although inflation in the US eased in past two months, supporting the view that strong price pressures have peaked, economists remain pessimistic, expecting that the recent Fed actions in form of sharp rate hikes, to fight soaring inflation, have slowed economic activity to the point when the economy will slide into recession.

The notion is supported by persisting concerns about elevated inflation for services and tight labor sector, as the latest data showed opening of 1.7 jobs for each unemployed person.

Investors focus on November job report on Friday, which is expected to give more details about the situation in the sector, as well as US inflation report for November (due on Dec) which would also provide fresh signals.

Technical studies remain in bullish setup on daily chart, with additional positive signal generated on Thursday’s break and close above 200DMA (index is trading above this indicator for the first time since early April), though fading bullish momentum warns that near-term action might be running out of steam.

Weekly studies are mixed and lack clearer signals, while bearish tone still prevails on monthly chart.

Near-term action needs to register repeated close above 200DMA (4040) to firm the structure and keep focus at the upside, for attack at next target at 4154 (50% retracement of 4807/3501).

Next strong supports lay at 4000 zone (10DMA / broken Fibo 38.2%), guarding lower breakpoint at 3940 zone (100DMA / Nov 29,30 lows), loss of which would generate initial signal of stall of a multi-week recovery..

Res: 4095; 4154; 4196; 4232.
Sup: 4040; 4000; 3959; 3940.