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S&P 500, Nasdaq 100: Dimon Warns of Hurricane as Banks Buckle Up

S&P 500, Nasdaq 100 Talking Points:

  • It’s been a tough year for stocks so far and the primary drivers behind that theme don’t look ready to dissipate anytime soon.
  • The past two weeks have seen equities bounce, very similar to late-March, but that doesn’t mean that bears are done just yet. Drivers are coming back to the headlines with tomorrow’s NFP, after which the Fed goes into their ‘blackout period’ ahead of the June rate decision. This means no Fed-speak until after the next hike.
  • We’ve been discussing these themes at DailyFX throughout 2022 and a host of analysts have taken bearish stances onUS equities as ‘Top Trades’ for Q2. To get the full Top Trades installment, the link below will allow for access.

It’s been a long five months to start the year for stocks. While markets have become conditioned to expect the Fed to cave to volatility, we’ve seen somewhat of the opposite this year and there’s an obvious reason for it. And this is something that we’ve continually heard the Fed warn about. Yesterday we even had Janet Yellen opine on the matter, saying that she was wrong about inflation being transitory and that the White House has several strategies for handling the matter.

That wasn’t the only notable remark making its way around yesterday, however, as JP Morgan CEO Jamie Dimon had some pretty pointed remarks on the matter. He urged investors to ‘brace yourself’ as a combination of inflation and the ongoing war in Ukraine could create a nasty scenario for markets later this year. Dimon’s quote was notable, saying “Right now, it’s kind of sunny, things are doing fine, everyone thinks the Fed can handle this. That hurricane is right out there, down the road, coming our way.”

Jamie Dimon is not a man known for hyperbole. And the very act of banks positioning for pain could, in essence, begin to create even more pressure.

This is why Central Banks will have a tendency to avoid warning of recessions, the game theory behind it. Because the very act of the Central Bank highlighting the possibility could, in effect, create the event itself. If investors react in anticipation of pain, as warned by the Central Bank, well the pain has already started, and that creates a domino effect where others react with pain. This helps to explain why markets have been so incredibly volatile in the first half of 2022 trade: We’re at a turn, and volatility often increases near major turns (see 2000, 2008).

To be clear, I’m not calling for a collapse or a major market meltdown. I do believe there’s a possibility of such but those instances, for the most part, are pretty unpredictable. Markets have traditionally needed a black swan-like driver for such scenarios. The year 2000 and the dot com bust had Enron, Worldcom and Arthur Anderson; 2008 had Bear Sterns, Lehman Brothers and Bernie Madoff – all factors that destroy confidence from market participants that cause investors to go to cash. And while I can’t rule out a similar scenario here I also don’t have adequate data to suggest otherwise. This seems more like a bear market/pullback scenario as the Fed further shifts policy. But, that could create more pain; we just have to wait and see. As Buffett says, ‘only when the tide goes out do you discover who has been swimming naked.’ I think the tide is on its way out, what happens after that, well, it seems that we’re about to find out.

S&P 500

The S&P 500 has briefly flickered into ‘bear market territory,’ falling by more than 20% from the prior high. That didn’t last for long, however, as the support zone around that -20% mark helped to hold the lows on May 20th, and buyers have been pushing a bounce ever since. That bounce ran all the way in to a clear zone of resistance, spanning from 4186-4211, which was a batch of support in February and March, around the time of that first Fed rate hike.

That support zone was also my support target from the Top Trade for this quarter. I was looking for a move down towards 3800, which has already happened in the first half of the quarter. The question now is whether there’s more to go, and I think there is given the current backdrop.

At this point, resistance remains at a key spot but sellers haven’t exactly taken advantage of the matter just yet, meaning that we can’t rule out another quick poke up to a fresh high. But, given that the Fed is about to go into blackout ahead of the June rate decision; with NFP on the cards for tomorrow, the bearish side remains as attractive with the big question of how far this current bounce might run. If buyers can pose a break beyond resistance at 4186-4211, there’s follow-through resistance at 4244 and 4304.

S&P 500 Four-Hour Price Chart

SPX four hour price chart

Chart prepared by James Stanley; S&P 500 on Tradingview

Nasdaq 100

I remain more bearish on the Nasdaq 100. The rationale roots in what I had said above, regarding the froth that becomes commonplace in low rate, debt-fueled backdrops. As that capital rushes away from speculation a cascade effect can follow.

And as a comparable point, the Nasdaq 100 remains in a bear market today, currently about -23.4% off of the ATH that was set in November. This highlights the additional pressure that high-beta corporates have seen as the rates conundrum comes into closer view.

From a technical perspective, the Fibonacci retracement produced by the pandemic move continues to guide price action. The 50% marker of that move helped to set support. And resistance came in on Monday, right around the 38.2% marker of that major move.

Like the S&P 500 above, sellers had a chance here to pose a resistance reaction but, so far, they haven’t. Which gives the appearance that a short-term topside breakout could show, but that’s around the time that shorts could become attractive again, particularly if buyers can’t hold support on the move.

My support target from the Q2 top trade was 11,700, which is around that 50% marker that’s already come into play. I think a move back to that level does not seem unreasonable and there could be potential for more depending on how aggressively the Fed addresses the rate situation at their meeting in the middle of next month.

Nasdaq 100 Four-Hour Price Chart

NQ four hour price chart

Chart prepared by James Stanley; Nasdaq 100 on Tradingview

— Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX