3 important signals for the coming week

Unfortunately, we are back to our old 2022 “wait and see” pattern, where the S&P 500 (SPY) is turning a bit sideways until the next big CPI report or the Fed meeting. But there are three things I look forward to in the coming weeks. Read on to find out what they are.

(Enjoy this updated version of my weekly commentary originally published Feb. 10^e2023 in the POWR Shares Under $10 Newsletter).

Market Commentary

Each of these can make a meaningful difference in the direction the market moves next.

Major technical support/resistance levels

Since September, the S&P 500 (SPY) has been trying to break back above the 4,100 level. This price has been a major support/resistance level for the index since February 2022 (and even further back, depending on who you talk to).

After breakouts failed in September, November and December, we finally had a significant break above this level in February…

…only for things to crash back down after this week’s sell-off.

Every time we fail to break above this level and stay ABOVE, the psychological resistance becomes even stronger and subsequent interruptions/failures become even more significant.

This doesn’t mean we’ll see a quick sell-off next week (maybe some light selling), but it does mean that this level will likely remain our cap until the FOMC meeting in March unless we get a big surprise.

January CPI report

…which we may be able to get as early as next week.

This will be the most important report to watch and it will be released early Tuesday morning. (Move over, Valentine’s Day.)

Hopefully investors will LOVE the results and our bull market will gain some more fundamental support rather than the semi-exuberance that seems to have propelled the market in the first month of the year.

Analysts are currently expecting a small drop in inflation. The Fed has also begun to acknowledge encouraging trends in its latest data releases. (I mentioned some of it in my January 13 analysis of the December CPI report.)

But there’s a chance the data isn’t as reassuring as we hope. Certain energy prices, such as crude oil, have stopped falling, and wage growth and the labor market have both remained strong.

The big wild card is “shelter,” which has the largest single weighting in the CPI report, which analysts disagree on whether that will be higher or lower.

Either way, the details will show us whether Powell’s concerns are justified and whether we’ll see many more rate hikes in the next few FOMC meetings. Which brings us to…

CME FedWatch Tool

This is a really handy tool that I am sure some of you are already aware of. It is the CME FedWatch Tooland it shows you exactly what is “priced in” in the market in terms of future rate hikes.

And with the market hanging on the Fed’s every word, it’s one of the most important risk assessment tools at our disposal.

…in other words, we can see in real time how much rate hikes traders actually expect over the next year, based on the price action we see in futures on Fed Funds.

So right now we can see 100% of traders think we’re going to have some sort of rate hike at the Fed meeting on March 22nd. The vast majority of traders think we will see another 25 basis point increase, while about 10% think we can see a 50 basis point increase.

But what’s really interesting is that it also shows what traders were thinking a day ago, a week ago and a month ago. Note that as of January 10, as many as 15% of traders thought there was a chance we would NOT have a rate hike in March.

But after Powell’s Feb. 1 press conference (where he stressed there was still work to be done) and January’s surprisingly strong labor report, that number had dropped to just 2.6%.

When people had a little more time to process that news, the number dropped to 0%.

It is no wonder that the market rally has slowed down. We are still operating under the idea that there is a cap that prevents any sort of continued bull breakout as long as we continue to see rising interest rates.

These figures are perfectly in line with what we see in the market…

January: “Hey, we might be done with that whole rate hike in March! Let’s party!”

change to

February 3: “Hmmm, we’re probably going to have some sort of rate hike in March, but DEFINITELY not a big one. Maybe I should stop buying so much.”

change to

Last week: “Well, we DEFINITELY get a 25 basis point increase in March… and maybe even a 50 basis point increase. Maybe I should take some of these January signings off the table…”

Maybe that’s a bit of Monday morning quarterbacking, but you can’t deny that the biggest driver of the market has been (and still is) monetary policy and how high and for how long the Fed is going to raise rates.

We’ve been talking about the discrepancy between what Powell says and how the market is trading for months, and this tool helps you track that in real time.

Conclusion

I know this commentary feels pretty bearish, but it’s really more about being cautious. I think there’s still a chance that we’re through it and that we have more in our future than we have in the future, but that’s not certain yet.

So we’re going to play it safe for now… and get ready for next week!

What to do now?

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All the best!

Meredith Margrave
Chief Growth Strategist, StockNews
Editor, POWR Newsletter Stocks Under $10

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SPY shares closed Friday at $408.04, up $0.95 (+0.23%). Year-to-date, SPY has gained 6.70% versus a percentage increase of the benchmark S&P 500 index over the same period.

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About the author: Meredith Margrave

Meredith Margrave has been a well-known financial expert and market commentator for the past two decades. She is currently the editor of the POWR growth And POWR shares under $10 newsletters. Learn more about Meredith’s background, along with links to her most recent articles.

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