Fed and the rate path
The market first dropped after Fed Chairman Worsh's move, which came across as a hawkish hike. His comments, plus the Fed's summary of economic projections, pushed yields higher, mostly on the short end. Fed fund futures now price in two more rate hikes for the rest of this year, and possibly three total before the cycle tops. That is more than the Fed itself signaled - the majority of Fed members projected only two more. So the market is re-rating rate-hike expectations to the upside, which shocked the S&P 500 (SPX).
S&P 500 technicals
Yesterday SPX hit key support at the 7500 level. This mattered for both trading volume and open interest, and Friday brought the quarterly options expiration. 7500 was the negative gamma level, so buyers stepped in and the index recouped 40 to 50 points of the loss intraday, closing off the lows. Today showed some follow-through, with early gains fading as the session went on.
Information technology, consumer discretionary, and materials led the sectors higher, with about 60% of the S&P 500 in the green. The index is pinned between the 50-day and 20-day moving averages, which are converging. That setup points to either a breakout up or a breakdown. Given the calendar and mechanical factors, elevated volatility over the next few sessions would not be surprising.
Bull flag read
On the weekly chart this looks like a bull flag pattern. The concern: SPX has made lower highs, and higher lows are not fully confirmed - on a closing basis yes, but on a tick basis (lows of day) it is still hitting lower lows. Price sits above the volume-weighted average price, around 74.25 for the E-Mini S&P 500 futures. The MACD is more encouraging, basing out and trying to cross into a bullish formation, which could carry the index out of the flag toward new all-time highs. Until the 20-day and 50-day levels resolve, the market stays skeptical on direction.
Typically the Monday and Tuesday after quarterly expiration is when the dust settles. Then positioning shifts toward the holiday trading season, which is usually bullish but comes with lower volume - the normal year-over-year pattern, expected again this time.
Economic data
Jobless claims came in at 196,000 for the week, well below the street's 207,000 estimate. The four-week moving average is 203,250. Initial claims and high-frequency labor data are holding up well, and BLS revisions over the last two months suggest the labor market is structurally sound. Wage growth is still decelerating, a point likely on the minds of many Fed members. Labor overall is holding up.
The Philly Fed headline came in at 37.8 versus the street's 31.3. New orders were lighter than expected at 29.2. Prices paid rose past last month to 48.6, an inflationary signal to watch. Better new orders show activity stepping up. This beat the Empire State reading from a couple days earlier, but nothing points to massive manufacturing growth on the East Coast.
Broad calendar
Several things could move the market: further Fed meetings and possible added rate hikes, midterm elections due in the next couple months, and the next earnings season. For the first time since 2021, all 11 sectors of the S&P 500 are currently expected to grow their earnings.
The AI trade
Through much of the summer the AI infrastructure trade and the hyperscaler trade broke down in correlation. A rough comparison chart pairs the five big AI chip stocks against the five big hyperscalers. Over the last three months these trades have often been inversely correlated and have mostly gone sideways.
Can NASDAQ 100 (NDX) or SPX reach new all-time highs without both groups working together to the upside? Yes, if you believe software keeps rising, along with communication services, since some companies blend the two. Microsoft (MSFT), though often called a hyperscaler, has been trading more like a software name lately. Google/Alphabet (GOOGL) sits in communication services, along with Meta (META), and that sector looks relatively healthy on the charts. A rebound in smaller growth-linked sectors - materials or industrials - could also add confidence that the high-beta trade can widen out.
A year ago heavy concentration drove new highs well. This year has been different, a rotational market that has been fairly healthy. Pullbacks have sent strong flows into defensive sectors like consumer staples. The AI trade now resembles what happened to Bitcoin: the old narratives that fueled it are losing their pull, and the market is hunting for a new one within the AI theme. That new narrative is likely a hybrid of software efficiency gains and some hardware components. A broadening market is healthier than one concentrated in a few names - better to spread risk across a basket of 20 or 30 than to bet on a couple.
