Risk appetite continues to remain insatiable on Wall Street. Yesterday, the S&P 500 recovered from early weakness to turn positive after weaker private sectors data cemented bets that the Fed will lower later this month, not that it was in any doubt. But any excuses for stock market bulls to buy the dip, they will – and they did. Today, index futures find themselves at new highs, tracking a strong performance in Europe. The US government shutdown has only impacted the forex markets, but equities have taken it in their stride. With a lack of any further data this week due to the shutdown, we may see some profit-taking. But dip-buying should ensure any downside will be limited until we either get some company earnings in or some other macro catalyst.
Government Shutdown? No Problem.
The slipped further against the yen overnight, while futures turned higher. Political deadlock and uncertainty over economic data releases means markets are holding on to the assumption that the Federal Reserve will stick with its projections for two further rate cuts this year. That backdrop makes a stronger case for stock market bulls cheering lower interest rates. Evidently, investors are also pouring into European markets as global capital seeks stability outside the US, especially where more fiscal stimulus is on the way e.g., Germany. The German DAX index has had a powerful rally in the last couple of days, and it too looked poise for a potential breakout.
Absence of New Drivers
The absence of new triggers may prompt some investors to lock in gains ahead of Q3 earnings season. Fed Chair Jerome Powell reminded markets last week there are “no risk-free paths” on rates, even as the FOMC had signalled two more cuts for this year. Meanwhile, tech stocks—particularly chipmakers—remain the market’s darling, keeping concerns about stretched valuations on the sidelines. With the underlying trend still bullish, dip-buying remains the preferred strategy, though the earnings season will be key in testing current valuations.
Can Earnings Justify Lofty Valuations?
So far, investors have eagerly supported every dip, driven by AI-fuelled optimism and consistent earnings strength from big tech. This has underpinned lofty valuations in the sector. If big tech takes a breather, the broader market may struggle to maintain momentum. That’s why the upcoming earnings season will be a critical test.
S&P Technical Analysis
The S&P 500 has again moved into overbought RSI levels on the daily time frame. It was already at overbought on weekly and monthly charts. A healthy pause or correction will be needed to work off these overbought conditions. But for now, the broader trend remains intact, with the index forming higher highs and higher lows. Despite the rally looking extended, and the daily RSI topping 70 merely suggests momentum remains strong and highlights strength rather than weakness for now, making short positions difficult to justify until support levels start breaking down.
Key Levels to Watch
- 6686: Short-term pivot and trend line
- 6611: Most recent low. A break here could spark a sharper correction towards 6500 and 6460
- 6756: The most recent record and September’s peak; we are now above this high which has opened the path to fresh records
- 6800 and 6900: Next round handles and potential resistance zones
- 6991: Marks the 161.8% Fibonacci extension from February’s decline – a key level given its proximity to the next big round handle of 7,000.
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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.