Tuesday's Market Minute: Countdown To The Fed Meeting

We are one day away from gaining better clarity on the Fed's view of the market events that have transpired in the past two weeks. As we have seen before, the Fed could either overestimate the health of the economy or underestimate the resiliency of the new type of consumer in the post-pandemic world. Let's examine the technical and fundamental setup before tomorrow's meeting:

Fundamentals: The S&P 500 is currently trading at a 17.70 forward multiple, which would be one of the highest levels of valuation for the market to "turn around" after a bear market. Although earnings season did not disappoint, the confidence exhibited by many companies in their forward guidance has been surprising for some, as we are beginning to see data that reflects potential cracks in the economy. With the Conference Board's Leading Indicators datapoint approaching recessionary levels and 60+ day auto delinquency rates reaching their highest levels since the 2008 financial crisis, executives continue to be cautiously optimistic. 

Technicals: A short-term bounce has occurred after the volatility experienced over the last week. The downward sloping trendline from the highs of last year continues to serve as a strong area of support, as we have breached that support line twice on an intraday basis, only to recover later in the session. Today, we will open above the 20-Day SMA, and for the bulls out there, the market needs to close solidly above this technical level on strong volume, which would indicate strength. Unfortunately, the strength in indexes like the SPX and the NDX has been provided by traditional large-cap names such as Apple (AAPL) and Microsoft (MSFT). If you look at the equal-weighted S&P 500 (SPXEW), you will see a different story: a complete breakdown. Investors have adjusted their portfolios to include stocks that have traditionally performed well during the most recent economic downturn. Large-cap tech stocks with cash balance sheets that rival the GDP of most countries have been favored. The key is broad-based participation, which fuels a rally. From a 5-year VIX seasonality standpoint, we may have one more push higher in volatility before a swift recovery.

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