The best trading signals markets give are often when the fundamental and technical signals align.

The discussion about what those fundamental and technical signals are, is a debate for another day. Today, we are past earnings period and the market will likely turn its focus from the micro (earnings) to the macro (economic risks). None are more important than what U.S. Federal Reserve Chair Jerome Powell says to Congress this week and the fact that the S&P 500 tested, broke, and reversed back above key moving averages last week. Namely: What will U.S. Senator Elizabeth Warren say about Powell’s “pushing hard to get more people fired” as he continues to aggressively fight inflation.

Back in December, when Warren made these comments, the Federal Open Market Committee (FOMC) was not yet saying higher for longer. In fact, their summary of economic projections (SEP) manifested in the dot plot, saw rate cuts expected in 2023. At the December projection, they still saw rate cuts in 2023, so it is not too surprising that the market still believes in rate cuts are coming. At the March 22 FOMC meeting, we get another SEP dot plot update—it should reflect the higher for longer outcome the FOMC is now pushing and what Powell will likely tell Congress this week.

Back in September and October, we were looking at the June lows as key support for the markets. At that time, expectations for 12-month forward earnings were around US$223 (vs. $220 today) and 10-year Treasuries were around 4 per cent like we see today.

Since the February 1 FOMC, the S&P 500 has shown a golden cross. This is an intermediate to longer-term bullish signal where the 50-day average crosses above the 200-day average. Last week, we saw the 200-day average hold on a test, break, rally behaviour. This has many of the technical bulls very excited.

Powell, if dovish, could support this price action. But, does the FOMC want easier financial conditions or tighter ones? We think the FOMC would be more comfortable with tighter conditions to help cool inflation pressures. History tells us, that we need to see the labour market contract to get there and thus the higher for longer narrative despite what Warren says about it.

A bearish resolution this week and a close below the 200-day average opens up the market to tighter financial conditions and a test of the next support areas around 3800 and below then 3600. Ask yourself what outcome would help the FOMC achieve their goal. Higher equities or lower equities? If it’s about higher for longer, than betting on the upside here seems like the wrong bet for now. Once the harder landing is priced in and the Fed is content that inflation will not heat up again, we can expect some stimulus and a more enduring equity market rally.

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