Trade of the Week: SPX500_m demands proof out of Nvidia, Jackson Hole

• S&P 500 on course to end 5-month winning streak
   
• Nvidia’s forecasted 10% post-earnings move may jolt SPX500_m
   
• Friday speech by Chair Powell to shape Fed rate hike bets
   
• Last Friday’s (August 18th) “doji” points to market indecision ahead of such a pivotal week
   
• Listed below: potential scenarios, support and resistance levels

 

It’s been an angsty August so far for the S&P 500.

This benchmark index, which is widely used to measure the overall performance of the US stock market, has fallen by about 4.8% so far this month.

The S&P 500 also appears headed for its worst monthly performance since December 2022 (down 5.9%), while its previous monthly drop was back in February 2023 (down 2.6%).

 

This week, the SPX500_m (which tracks the underlying S&P 500) is at the mercy of two of the largest market themes of 2023 coming head-to-head:

 

1) AI-mania: just hype? or real earnings booster?

Investors hope that artificial intelligence would supercharge corporate earnings for decades to come, even as the technology promises to change our everyday lives.

And few have benefited from such expectations more than Nvidia.

This chipmaker’s stocks still boast of a 196.3% year-to-date climb, being the best-performing stock on the S&P 500 so far this year, despite having dropped 8.8% from its all-time high set on July 18th.

This chipmaker still has a market cap of over US$ 1 trillion (that’s $1,000,000,000,000), making it the 4th largest stock on the benchmark S&P 500 index.

Nvidia is due to release its latest quarterly results after US markets close on Wednesday, August 23rd.

Markets are currently predicting that this stock could move by 10.2%, either up or down, on Thursday - the day after Nvidia's earnings release.

Of course, whether this stock climb higher or drops lower depends on the reaction to Nvidia’s financial results last quarter, as well as its forward guidance for future earnings.

Broadly speaking, if Nvidia can convince markets that the AI-hype is truly translating into a meaningful earnings boost, that could help the SPX500_m pare recent losses.

 

 

2) US interest rates - higher for longer?

The annual Jackson Hole Economic Symposium, organized by the Kansas City Fed, is set to happen between August 24th – 26th, bringing together the world’s top central bankers, policymakers, and economists.

The highlight is, of course, the speech by Fed Chair Jerome Powell, on Friday, August 25th.

After all, Chair Powell leads the world’s most influential central bank – the US Federal Reserve.

 

Since 2022, markets have been obsessing over how high the Fed would send US interest rates.

My article this time last year (dated 22 August 2022), in previewing last year’s Jackson Hole symposium, carried these words:

“And here’s the biggest question on everyone’s minds: how much higher will the Fed hike US interest rates?”

12 months later, yet the same question remains in play.

There’s also an added layer to that question posed in August 2023:

“How long will the Fed maintain its benchmark rates at its peak, before considering a rate cut?”

 

Here are the market's current expectations surrounding US interest rates:

• merely an 11% chance that the Fed would trigger another 25-basis point HIKE at its September FOMC meeting
   
• one-in-three chance (38% odds) that there would be one more 25-bps HIKE by the Fed between now and end-2023
   
• one-in-three chance (35% odds) that there would be a 25-bps CUT by March 2024
   
• 87% chance of a Fed rate CUT by May 2024

 

How did markets react to Powell's speech at 2022's Jackson Hole event?

As a reminder, Chair Powell's speech back on 26 August 2022 triggered a 3.4% drop in the S&P 500 on the day.

The benchmark stock index went on to fall by a further 11.85% after the previous symposium concluded, reaching its trough in October, before going on to stage an AI-fuelled rally since (albeit with a pullback so far in August 2023).

It was clear then that traders and investors willingly took to heart Powell's tough messaging back then about "unusually large" Fed rate hikes.

Although the days of 75-bps Fed rate hikes are now relegated to the past, markets remain primed to react to Powell's policy signals this week.

 

As for Chair Powell's speech ahead of this coming weekend, here are some potential scenarios that may affect the SPX500_m:

1. If Chair Powell delivers a higher-for-longer message, i.e. US interest rates could go even higher and stay at that peak for longer than what markets currently expect, that could drag the SPX500_m even lower.
   
   After all, tech stocks generally do not like the thought of higher US interest rates.
   
   And the biggest components of the S&P 500 are Big Tech names such as Apple, Microsoft, Amazon, Alphabet, and of course, Nvidia.
   
    
2. On the other hand, if Chair Powell surprises markets and suggests that the Fed has raised its benchmark rates high enough to finally subdue multi-decade high inflation in the US, that could be cause for rejoicing among SPX500_m bulls.

 

 

From a technical perspective …

The doji candlestick formed last Friday, August 18th, points to indecision among traders, especially leading into such a week that promises stern test for the US stock market.

This doji could herald a period of price consolidation, or perhaps even the formation of a new trend.

 

Keeping in mind the looming fundamental catalysts as well was technical setups ...

Here are some key levels to look out for on the SPX500_m daily chart:

POTENTIAL SUPPORT

• 4335:  intraday low on August 18th/late-June lows
   
• 100-day SMA and key Fibonacci level
   
• 4301 - 4260: early-June range

 

POTENTIAL RESISTANCE

• 4400: psychologically-important mark/Fib retracement
   
• 4452 – 4463: June cycle highs
   
• 50-day simple moving average (SMA)

 

 

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