The S&P 500 has rebounded from recent losses and is gaining traction due to anticipated Federal Reserve rate cuts. The market is expecting three rate cuts totalling 68 basis points by year-end. There is also an 8% chance of a 50 basis points cut in September, potentially contingent on a soft Consumer Price Index (CPI) report, which could further elevate the stock market towards new highs.
Long-term growth prospects remain optimistic, despite economic uncertainties earlier in the year. The expectation of rate cuts and a stabilising labour market, previously unsettled by policy changes, could stimulate economic activity beneficial for the stock market.
Technical Analysis Of S&P 500
Technically, the S&P 500 is trading within a rising wedge pattern on the daily chart, showing potential for both upward momentum and pullback risk. On the 4-hour chart, a minor upward trendline indicates bullish momentum, with buyers likely reinforcing positions at the trendline. The 1-hour chart highlights a support zone around the trendline and the 6,520 level, where buyers and sellers are preparing for potential moves to new highs or further drops, respectively.
Key data releases include the US CPI report, Jobless Claims figures, and the University of Michigan Consumer Sentiment report.
We are seeing the market completely shrug off bad news, focusing instead on the promise of lower interest rates from the Federal Reserve. The soft Non-Farm Payrolls report from September 5th, which came in at just 95,000 jobs added, was quickly forgotten. This dovish bias continues to be the primary tailwind for equities.
This morning’s Consumer Price Index report further fueled this optimism, showing core inflation rose just 0.1% last month against expectations of 0.3%. Consequently, market pricing for rate cuts has intensified, with CME FedWatch probabilities now suggesting more than 75 basis points of easing by December. There’s even growing talk of a 50 basis point cut this month, a scenario that seemed unlikely just weeks ago.
Options And Market Sentiment
For derivative traders, this environment suggests buying call options on any pullbacks toward established support levels. We are looking at the upward trendline around the 6,520 mark on the S&P 500 as a prime area to initiate bullish positions. The goal is to ride the momentum created by these positive rate-cut expectations.
However, we must also consider the rising wedge formation on the daily chart, which often precedes a correction. As the S&P 500 approaches the upper boundary of this pattern, purchasing put options offers a well-defined risk to protect against a potential downturn. With the VIX currently suppressed at a low 13.5, far below its historical average of around 19, volatility-linked products also present a cheap hedge against a sudden reversal.
We see the market looking past the frozen labor market that we navigated in the first half of the year, viewing it as a temporary issue. The consensus is that upcoming rate cuts will thaw economic activity and spur growth in the final quarter. This forward-looking view is why fundamentals seem disconnected from the market’s strong performance.
