The Factory Daily Letter

Please read important disclosure information at the end of the document. It is reserved for the exclusive use of the recipient. This document is intended for distribution to professional clients, accredited investors, expert investors and institutional investors only and not for distribution to retail investors.

The technical view

May's US inflation print put a pin in the rally, and investors are now waiting for the Fed

After a week of waiting for the latest CPI numbers, the S&P500 closed Friday sharply lower almost erasing May's relief rally in its entirety. Last week in our technical update, we talked about the possibility of a pullback which could have presented tactical entry opportunity before the positive momentum resumed. However, the magnitude of the current downward move means that it cannot be considered “healthy consolidation” and a break of the former lows on the S&P500 would represent further deterioration of the technical outlook.

The relief rally emerged out of a combination of oversold technical levels and extremely pessimistic sentiment, which from a contrarian perspective had attracted the most opportunistic investors, enticing them back into the market. The relief rally was also fuelled by the narrative around a possible peak in inflation, and the possibility that the Fed may pause in its rate hikes in the autumn, in order to not degrade economic growth too much. Friday's CPI and U. of Michigan data however showed that (1) inflation has not yet peaked and (2) consumer confidence has collapsed to historically low levels, reigniting fears of stagflation: that most unfavourable scenario for equities.

Against this backdrop, the outlook for risky assets will remain challenging, and moreover a daily close below key technical support could prompt investors to return to a more conservative sector allocation. For the time being, markets have not yet seen any capitulation moves, which can in itself be seen as a positive sign of resilience, but it also raises the risk of further downside should the negative trend gain traction.

US inflation remains stubbornly high.

While many were hoping that the Consumer Price Index (CPI) figures released Friday would show signs that inflation is peaking, consumer prices actually rose more than expected in May, with the year-on-year CPI increase (8.6%) being the highest since December 1981.

Looking at the detail, the rise was due to a new "perfect storm" of:

  • rising food and energy prices (partly linked to Ukraine and Russia);
  • ongoing bottlenecks (observed particularly in car prices, but also partly influenced by the situation in China); and
  • the strong "reopening" pressures in transport/leisure services as well as rent inertia (partly due to the way the index is calculated):
Source: FactSet; Pictet Trading Strategy; as of 13/6/2022.

The prospect of a Fed pause has all but vanished

The chart below shows market expectations for the rate component of the Fed's normalization policy. A 50 basis-point increase in the federal funds rate at this week's Federal Open Market Committee meeting appears to be a certainty, and the same goes for July and September. However, the market has now begun to expect the Fed to become more aggressive (with pricing now heading towards 75-basis point increases in June and July):

Source: FactSet; Pictet Trading Strategy; as of 13/6/2022.

Yesterday, the S&P 500 fell at the open and entered a bear market

Using the chart below we can crudely compare the current market correction with those since 1990. Excluding the bear markets that followed the dot-com bubble and the global financial crisis, the current correction is consistent with historic lows.

Source: FactSet; Pictet Trading Strategy; as of 13/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

The magnitude of last this drawdown means it cannot be considered a healthy pullback

As we discussed in our Technical View last week, it is our view that the S&P500 has completed a classic zigzag corrective pattern, in which the price tends to follow a 5-3-5 structure, labelled A-B-C. Since the May low, the US equity index has rebounded and appears to be forming what may be a first Elliot wave (itself broken down into 5 minor waves).

Against this backdrop, we argued that a daily close below 4,140 could send the index towards next support at 4,062, which would provide an entry point on the basis that the bullish momentum then resumed towards the next resistance at 4,300.

Contrary to our expectations however, the support at 4,062 failed to hold and the correction accelerated sharply into the end of the week. This action cannot be considered a healthy consolidation and if the index remains below its previous low, our short-term bullish scenario would be invalidated.

Source: FactSet; Pictet Trading Strategy; as of 13/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

Despite further technical damage, the index could still be on the verge of bottoming. Where is the next support?

The S&P500 index closed the week down over 5% with 90% of stocks in negative territory. This broad-based decline reflects the great level of uncertainty in the market and the lack of risk appetite ahead of tomorrow's Fed meeting.

From a technical point of view, the momentum indicators crossed lower and the index hit another important support at 3,900, a level corresponding to the prior low and the 50% Fibonacci retracement of the post-Covid rally. The next support is now at around 3,680, the 61.8% Fibonacci retracement which should theoretically mark the end of the correction phase. Short-term, the RSI is forming a bullish divergence suggesting that the negative momentum may lose some steam and an attempt to form a bottom may be under way.

Source: FactSet; Pictet Trading Strategy; as of 13/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

The S&P500 has fallen more than 1% for three consecutive days, an event that is historically consistent with market lows

Over the past decade, we have become used to stock markets in which daily volatility rarely exceed 1%. But since the beginning of the year it has returned. However, even in periods of high uncertainty, three consecutive days with a drop of more than 1% are quite rare and historically have occurred near major bottoms. After 100-days, the median performance is at 7.1% with nearly 70% of positive occurrences (after 50-days the positive occurrence tops at nearly 80% with a median performance of 4.8%).

The chart below shows indicates by way of the vertical lines when such occurrences have taken place, while the chart below shows the average evolution of the S&P500’s performance in the 100 days following such signals.

Source: FactSet; Pictet Trading Strategy; as of 13/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

Stocks with three consecutive down days of more than 1% with strong quantitative grades

In these conditions, our short-term bullish outlook is being challenged - and the overall environment remains challenging.

However, after such declines, opportunities in quality stocks tend to emerge and for the more opportunistic investors we present below a screening of S&P500 members that have quantitative grades above 55 and have experienced strong reversals in the last 3 days. For long-term investors, the stressors that have been weighing on investor sentiment, including signs of spiking inflation, need to start showing some improvement (and in this context, the momentum in WTI crude oil could be about to fade in what could be a first positive sign).

The table contains those names within the S&P500 that have suffered at least 3 consecutive days of declines of 1% or more. The stocks are categorized overall and have and RSI above 35, suggesting that the stocks have weathered the recent acceleration of the downturn relatively well. These stocks are candidates for stock pickers looking for quality stocks to buy on weakness.

Source: FactSet; Pictet Trading Strategy; as of 13/6/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of any Pictet financial research unit.

More technicals?

For our latest technical views on equity indices as well as currencies commodities and 10-year yields see our weekly publications linked below:

Technical views (indices)

Technical views (currencies, commodities and FI)

Banque Pictet & Cie SA

Pictet Trading & Sales
Trading Strategy

Route des Acacias 60
1211 Geneva 73
Tel +41 58 323 2323
Fax +41 58 323 2324

Please see criteria explanation in the endnotes

Should you require any further information, please contact the team
Tel +41 58 323 1250
Email to: tradingstrategy@pictet.com

Disclosure and Disclaimer information is available by consulting the following link: https://www.group.pictet/strategy