Category Archives: SP 500

The S&P 500, a Better-Than-Expected Inflation Report, and the Biggest Short Squeeze in Market History

In an especially volatile year, the S&P 500 (Index: SPX) continues to provide excitement! The index closed the trading week at 3,992.93, ending Friday, 11 November 2022 up 222.38 points (+5.9%) from the close of the previous trading week.

Getting there involved the thirteenth Lévy flight event of 2022 by our rough count, prompted by a better-than-expected Consumer Price Inflation report, and fueled by what ZeroHedge described as the "biggest short-squeeze on record, based on Goldman's 'Most Shorted' basket".

For the dividend futures-based model's alternative futures chart, we see the new Lévy flight event as a shift in the forward-looking time horizon for investors from 2023-Q1 back toward the current quarter of 2022-Q4.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 11 Nov 2022

That shift occurred because with inflation being reported lower than expected, the message the Federal Reserve's interest-rate setting Federal Open Market Committee will send at its upcoming 13-14 December 2022 meetings will carry especial weight for what investors should expect going into 2023.

Going back to the alternative futures chart, we see the level of the S&P 500 is elevated with respect to the trajectory for investors focusing their attention on 2022-Q4. It's running at the high end of the range the model projects over the next several weeks, which may be the result of noise from the short-squeeze rally.

Given that investors are focusing on 2022-Q4, we need to point out there will be at least one more Lévy flight event before the end of 2022. If that happens during the next several weeks, that means stock prices would fall by a significant percentage. There's also the wild card factor of the additional noise that has been injected into the market from the short squeeze event. Noise always dissipates, it's only ever a question of when. In this case, that dissipation will also mean falling stock prices.

Here's a recap of the week's market moving headlines:

Monday, 7 November 2022
Tuesday, 8 November 2022
Wednesday, 9 November 2022
Thursday, 10 November 2022
Friday, 11 November 2022

With the lower-than-expected Consumer Price Inflation report, the CME Group's FedWatch Tool still has a half point rate hike on tap for 14 December (2022-Q4). But in 2023, the FedWatch tool now projects two quarter point rate hikes, in February and March (2023-Q1), with the Federal Funds Rate reaching a peak target range of 4.75-5.00%. Looking further forward, the FedWatch tool anticipates two quarter point rate cuts in 2023-Q4 (November and December) as developing recessionary conditions take hold in the U.S. economy.

Meanwhile, the Atlanta Fed's GDPNow tool's projection for real GDP growth in 2022-Q4 rose to +4.0% from last week's +3.6% estimate. There continues to be a big gap between its current projection and the so-called "Blue Chip consensus" that anticipates near zero growth in 2022-Q4.

The S&P 500 Drops As Expected When Investors Shift Focus to 2023-Q1

If it seems like it was just a week ago that we issued a cautionary note that the S&P 500 (Index: SPX) would face a downward movement if investors shifted their attention to any point in the future other than 2022-Q4, that's because it was.

We said it would absolutely happen before the end of 2022-Q4. But we didn't have to wait very long at all, because it happened last week. The latest update to the dividend futures-based model's alternative futures chart shows it as the twelfth Lévy flight event of 2022, as investors refocused their attention on the first quarter of 2023.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 4 Nov 2022

The cause of the shift was easy to find in the week's newstream. It's directly tied to changing expectations for how the Federal Reserve's Federal Open Market Committee (FOMC) will be changing the Federal Funds Rate in upcoming months. The FOMC concluded a two day meeting on Wednesday, 2 November 2022, announcing it would immediately hike interest rates by three quarters of a percent, but it was Fed Chair Jerome Powell's press conference following the announcement that prompted investors to immediately shift their expectations for the future timing of when and how high the Fed's rate hikes will top out.

The CME Group's FedWatch Tool captured the associated change in expectations for the Fed's future rate hikes. After the announcement, it continued to project a half point rate hike on 14 December (2022-Q4). But in 2023, the FedWatch tool anticipates the Federal Funds Rate rising to a target range of 5.00-5.25% in 2023-Q1 and holding at that level until a quarter point rate cut might takes place in December (2023-Q4). As would be expected, the change for how high and, more importantly, when the Fed's series of rate hikes will peak in 2023-Q1 is behind the shift of investors' time horizon from 2022-Q4 to 2023-Q1. The trading week ended with investors having focused nearly all their forward-looking attention on the first quarter of 2023, fully accounting for the amount by which the S&P 500 dropped from the previous week.

Other stuff happened too during the week, which helps provide context for the environment in which these changes happened. Here's our summary of the week's market moving headlines:

Monday, 31 October 2022
Tuesday, 1 November 2022
Wednesday, 2 November 2022
Thursday, 3 November 2022
Friday, 4 November 2022

The Atlanta Fed's GDPNow tool's projection for real GDP growth in 2022-Q4 is +3.6%, up from its estimate of +3.1% at the end of the previous trading week. There's a big gap between its current projection and the so-called "Blue Chip consensus", which anticipates near zero growth in 2022-Q4. We'll see how these economic growth projections evolve during the rest of the quarter.

The S&P 500 Rises with Investors Focusing on 2022-Q4

The final full trading week of October 2022 saw the S&P 500 (Index: SPX) rise 148.31 points, or just shy of 4%, to end the week at 3,901.06. That's the highest close for the index since 14 September 2022, which puts it 895.50 points away from its record high close of 4,796.56 on 3 January 2022.

The S&P 500's trajectory during the week remains consistent with investors focusing on the current quarter of 2022-Q4 in setting current day stock prices. The latest update to the alternative futures chart shows where that puts the S&P 500's trajectory with respect to the dividend futures-based model's projections of where the index would be if investors shifted their attention to more distant future quarters.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 28 Oct 2022

We're taking the trouble to point those alternative futures out because investors being focused on the current quarter means one thing with absolute surety. By the time this quarter ends, they will shift their forward looking focus to one of these other points on the time horizon. That shift, regardless of which future quarter they might settle upon, will be accompanied by a downward movement in the level of the index. How much of a downward movement will be determined first by which quarter draws their gaze and second by how much the expectations for dividends for that quarter might change.

We've seen that phenomenon before. It happened most recently during the second half of the second quarter of 2022 as the level of the S&P 500 repeatedly see-sawed between the levels associated with investors looking at different points of time in the future. For us, it's exciting to watch these Lévy flight events play out in real time. Depending on how you're invested, your entertainment factor while experiencing such high percentage changes in value may differ....

While the remainder of 2022-Q4 may not be quite as volatile as 2022-Q2 was, the one thing that can prompt investors to suddenly shift their time horizons is what they find in the random onset of new information. With that in mind, here are the market-moving headlines investors absorbed during the past week.

Monday, 24 October 2022
Tuesday, 25 October 2022
Wednesday, 26 October 2022
Thursday, 27 October 2022
Friday, 28 October 2022

The CME Group's FedWatch Tool continues to project a three-quarter point rate hike when the FOMC next meets on 2 November 2022 and a half point rate hike on 14 December (2022-Q4). In 2023, the FedWatch tool projects another half point rate hike in February (2023-Q1), but now anticipates a quarter point rate hike in May (2023-Q2). That's followed by two quarter point rate cuts, the first as early as June (2023-Q2) and the second in November (2023-Q4).

The Atlanta Fed's GDPNow tool's first projection for real GDP growth in 2022-Q4 is +3.1%. Meanwhile, to close the books on 2022-Q3, the Bureau of Economic Analysis first estimate of real GDP for 2022-Q3 is 2.6%, slightly lower than the GDPNow tools' final forecast of 2.9% for the recently ended quarter.

S&P 500 Jumps as Fed Signals Rate Hikes to Shrink, End Sooner

The S&P 500 (Index: SPX underwent its eleventh Lévy flight event of 2022, jumping to close out the third week of October 2022 at 3,752.75, up 159.99 points (+4.4%) from the previous week's close.

That's an exciting development, because while previous swings in recent weeks have come close, they weren't quite large enough to qualify as a full Lévy flight event where investors shift their forward looking focus from one point of time in the future to another. For this latest event, it appears investors shifted their attention from 2023-Q3 inward to the nearer term future of the current quarter of 2022-Q4.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 21 Oct 2022

That change coincides with signals members of the Federal Reserve sent, mainly on Friday, 21 October 2022, that they were looking to reduce the size of their expected rate hike in December 2022. Previously, investors were anticipating another three-quarter point rate hike in December, but were focusing on 2022-Q2 because that period coincided with when they expected the Fed's current series of rate hikes would peak.

We don't know how long investors might hold their attention on 2022-Q4. If investors become more concerned about the timing of when the Fed's rate hikes will top out, it would make sense for them to shift their focus to the next future quarter of 2023-Q1. The alternative futures chart indicates the Lévy flight that would coincide with such a change would be a low energy event. Stock prices could simply move mostly sideways to achieve that result. Meanwhile, if investors shift their term horizon back to 2023-Q2, the S&P 500 would see a noteworthy decline.

The only thing we know for sure is that investors will shift their investment horizon away from the current quarter at some point, and will absolutely do so by the end of the third Friday in December 2022.

When that happens will be subject to the random onset of new information. Speaking of which, here are the market-moving headlines we noted during the week that was.

Monday, 17 October 2022
Tuesday, 18 October 2022
Wednesday, 19 October 2022
Thursday, 20 October 2022
Friday, 21 October 2022

The CME Group's FedWatch Tool continues to project a three-quarter point rate hike when the FOMC next meets on 2 November 2022, but pulled back to project just a half point rate hike on 14 December (2022-Q4) following Friday's signals from the Fed. In 2023, the FedWatch tool now projects just a single half point rate hike in February (2023-Q1), setting the top for the Federal Funds Rate's target range at 4.75-5.00% and holding at that level for much of the rest of the year. Looking further forward, the FedWatch tool anticipates a quarter point rate cut in December (2023-Q4).

The Atlanta Fed's GDPNow tool's projection for real GDP growth in the recently ended calendar quarter of 2022-Q3 is +2.9%. The Bureau of Economic Analysis will provide its first official estimate of real GDP growth in 2022-Q3 on 27 October 2022, so the GDPNow tool should soon start forecasting real GDP for 2022-Q4.

S&P 500 Resumes Downtrend in Another Volatile Week of Trading

With another higher-than-expected inflation print during the week, the S&P 500 (Index: SPX) experienced another surge of volatility during the week that was.

But by the end of the week's trading, the index closed at 3,592.76, down 46.90 points or 1.3% from the previous week's close. It also ended the week right in the middle of the most recent redzone forecast range we added to the alternative futures chart several weeks ago, as stock prices resumed their downtrend.

Alternative Futures - S&P 500 - 2022Q4 - Standard Model (m=+2.0 from 13 September 2022) - Snapshot on 14 Oct 2022

The week's most volatile action is concentrated from Thursday to Friday, 13-14 October 2022. The pricipitating factor for the volatility was the higher-than-expected rate of inflation in the U.S. reported on 13 October 2022. That news initially sent stock prices until the prospect of a full percentage point increase by the Fed at its next meeting prompted a surge in stock prices as investors shifted a portion of their forward looking focus toward the nearer term.

But only a partial shift, where once again, the change in stock prices didn't change enough to qualify as a full Lévy flight. By the end of the week, we find the S&P 500's trajectory to be consistent with the projected trajectory associated with investors focusing their attention fully on 2023-Q2.

We'll discuss the reason why that is at the end, following our recap of the week's market moving headlines.

Monday, 10 October 2022
Tuesday, 11 October 2022
Wednesday, 12 October 2022
Thursday, 13 October 2022
Friday, 14 October 2022

The CME Group's FedWatch Tool continues to project a three-quarter point rate hike when the FOMC next meets on 2 November 2022, but now signals it will be followed by another on 14 December (2022-Q4). In 2023, the FedWatch tool now projects quarter point rate hikes in February and March (2023-Q1), setting the top for the Federal Funds Rate's target range at 5.00-5.25%. However, that could reverse as earlier as May (2023-Q2) as developing recessionary conditions force the Fed to change its rate hike tactics.

The Atlanta Fed's GDPNow tool's projection for real GDP growth in the just-ended calendar quarter of 2022-Q3 dipped slightly from +2.9% to +2.3% as the U.S. economy rebounded from the week first half of 2022, as supported by recent trade and atmospheric CO₂ data. The Bureau of Economic Analysis will provide its first official estimate of real GDP growth in 2022-Q3 on 27 October 2022.