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- The stock market is poised for a dramatic move in either direction as investors eye key inflation data.
- That's according to Fairlead Strategies' Katie Stockton, who said the S&P 500 can fall 7% to retest its May low.
- These are the key technical levels Stockton is monitoring to gauge which way the market will go.
The stock market is wound up for a dramatic move in either direction as investors await Friday's hotly anticipated May consumer price index report that will show how hot inflation was running last month.
That's according to Fairlead Strategies' Katie Stockton, who said in a Thursday note that the S&P 500 could fall 7% from current levels to retest its May low of 3,815 as support. That's if the index manages to decisively close below 4,090. The S&P 500 traded at 4,092 Thursday afternoon.
On the flipside, Stockton sees potential for the S&P 500 to break above its tight 10-day long trading range if the index decisively breaks above resistance at 4,160. If the S&P 500 breaks above that resistance level, a rise to its 200-day moving average near 4,400 is possible, representing potential upside of 8% from current levels.
"The S&P 500 remains wound up in a tight intraday trading range, which has the potential to be resolved in dramatic fashion (they often give way to sharp moves)," Stockton said.
The potential massive move in the stock market that Stockton expects likely hinges on Friday's CPI report, which will give investors a better understanding of whether inflationary pressures have peaked, or if higher gas prices and food are likely to continue pushing the consumer price higher.
If the latter is true, that would put more pressure on the Federal Reserve to hike interest rates and unwind its balance sheet, which could put pressure on stock prices as liquidity slowly exits the bond market, companies grapple with a higher cost of capital, and equity analysts adjust their valuation models with a higher discount rate.
In that scenario, the S&P 500 falling 7% to retest its lows at 3,815 seems more than reasonable, if not optimistic.
But if Friday's inflation report gives any indication that inflation has peaked, supply chain pressures are easing, and the labor market is cooling, that could give the Fed some breathing room in its rate hike trajectory, and thus ease investors concerns about both higher prices and higher rates. In essence, this scenario represents the Fed sticking the goldilocks scenario of a "soft landing," which makes a 8% rise in the S&P 500 to 4,400 sound reasonable.
Economists surveyed by Bloomberg expect the CPI to have been unchanged at 8.3% in May, and expect core inflation to have fallen to 5.9% from 6.2% in April.
source https://markets.businessinsider.com/news/stocks/stock-market-outlook-dramatic-move-imminent-technicals-investors-eye-inflation-2022-6