SPDR S&P 500 ETF Trust (SPY) Forecast: PPI, CPI and then earnings to set the direction

SPY attempts to put a bottom in place before CPI and earnings.
Bank of England comments dumped on risk assets and SPY turned lower.
All eyes now turn to Thursday's CPI data and bond yields.

Ivan Brian FXStreet

Stocks were attempting to get their rally on during the first half of Tuesday's session. Things were looking solid for a short-term bottom until the Bank of England once again issued a confusing communique. Equities all turned and exited stage left, closing lower for the day.

SPY news

The Bank of England put a target on its back yet again when it said Friday was the deadline for pension funds to get themselves sorted before the Bank of England pulls the rug from under them in the bond market. This immediately set in motion a risk-off rally as cable (GBP/USD) collapsed and investors rushed for the exits. Stocks closed lower as a result. We then had the bizarre situation this morning with The Financial Times reporting that the Bank of England may extend the gilt buying program. BoE then retorted that this Friday is the end of the program.

Confused? Excellent, so are we. Nevertheless, we need to focus instead on the other side of the Atlantic. I still see the risk-reward skewed to a short-term rally. Sentiment is terrible, positioning is very short and bearish. Hedge funds are short and CTAs will need to chase any rally with sizable buys. Buybacks are set to restart next week in a big way. October, especially the back half of October, is historically a bull month and more so in a midterm election year. Two hurdles come in the form of CPI on Thursday and then earnings season. CPI is indeed the big one, and the reaction is key. Earnings season has already been marked down in investors' minds. Expectations are low. Analysts have already set the bar down and cut EPS forecasts.

We still are likely in the middle of a long-term bear market. P/Es are too high, EPS cuts are still not at bear market levels.

According to Bloomberg, if today were the bear market bottom it would be the highest P/E for the SPX of any bear market low since at least 1957. Average bear market low P/E = 12.6x, current P/E = 17.9x. pic.twitter.com/usn4N7ZR2n
— BWK Capital (@BwkCapital) September 26, 2022

2/5. Next, the GFC. So EPS fell 21.7% y/y in 2008, then another 81.0% in 2009. Note earnings as of 1 Jan each year. So this is a trailing number. pic.twitter.com/lMXtTTwxkD
— One Bubble to Rule Them All (@shortl2021) October 8, 2022

SPY forecast

Last Friday's low was just breached on Tuesday, but so far we have a double bottom in place. These patterns are reversal signals. Ahead of the CPI data, we are likely to see some position squaring, so I would expect the double bottom to hold. Thursday's CPI is crucial. If we can hold the lows then that opens the door for a move to $373. That remains my pivot. Above there would allow a target of $388.

SPY daily chart

Author

Ivan Brian

FXStreet

Ivan Brian started his career with AIB Bank in corporate finance and then worked for seven years at Baxter. He started as a macro analyst before becoming Head of Research and then CFO.

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