Bearish SP500 Index
At the end of 2022, the topic of the “turning point” of the central bank’s monetary policy has been widely discussed, among which the terminal interest rate of the Federal Reserve and the financial environment of other major economies have attracted the most attention. As inflation is retreating from multi-decade highs, capital markets betting on a soft landing for the economy has once again become the main trading logic. The author believes that the interplay between interest rate forecasts and market performance will continue to be a key driver of the overall market going into 2023, so the search for trading opportunities should take advantage of this theme.
During most of the fourth quarter of 2022, the SP500 index rebounded very significantly, recovering half of the annual decline in the first ten days of December. Looking at the larger cycle, although the SP500 index fell into a technical “bear market” in June (down 20% from the January high) and hit 50% of the March 2020 low/January 2022 high in October Fibonacci retracement levels, but this is still only a mild correction from the long-term bull trend from the 2008 financial crisis lows.
According to the pricing of Fed funds rate futures and other products, major central banks such as the Federal Reserve may be close to the end of the interest rate hike cycle, but the Fed and other major central banks have recently reiterated their stance on tightening monetary policy, saying that they will continue to increase interest rates and shrink their balance sheets liquidity back and forth, even if this would lead to a market correction and a possible recession. As such, I have a long-term bearish view on benchmark indices such as the SP500.
SP500 index weekly chart, fed funds rate futures and COT positions
Chart Source: TradingView Graphics: John Kicklighter
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