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Nasdaq futures are down almost 3% Monday after U.S. Treasury yields moved sharply higher, driven by rising rates and fears that aggressive rate hikes by the Fed will push the economy into recession.
An increasing number of investors are now expecting a 75 basis points hike to be announced at the long-awaited Federal Open Market Committee (FOMC) meeting later this week, instead of the initially expected 50 basis point increase.
The 2-year/10-year U.S. Treasury yield inverted for the first time in two months, with many economists viewing this as a sign of recession that could come in the following years.
Key market indexes also tumbled following the latest consumer price index (CPI) data, with the Dow, S&P 500, and Nasdaq by 2.7%, 2.9%, and 3.5%, respectively.
Bank of America technical research strategist Stephen Suttmeier has weighed in on the S&P 500 technicals as futures point towards a sharp drop on Monday.
The S&P 500 futures are trading in the low 3800s with Suttmeier noting a support zone between 3858 and 3810.
“The inability to clear first resistances and the lack of bullish follow-through signals from the indicators increase the risk for lower lows toward the next supports at 3500 (50% of the March 2020-January 2022 rally and rising 200-week MA) on the SPX,” he told clients in a note.
As for NDX, the strategist sees a support zone between 10,776 and 10,589 (rising 200-week MA and 61.8% retracement of the March 2020-November 2021 rally).
Suttmeier also reminds clients that key tactical indicators failed to break out.
“The US top 15 most active advance-decline line stalled at 3123, the percentage of SPX stocks above 50-day MAs failed to breakout above 46.3-48.7% and the 3-month VIX relative to the VIX failed to clear 1.10-1.11. We viewed these as resistances to break above that would favor a continued rally in last week’s Market Comment. The failure of these indicators to breakout is a major risk and US equities have responded bearishly,” he concluded.
On the other hand, Goldman Sachs’ David Kostin sees the S&P 500 dropping all the way to 3150 in a recession.
“If by year-end consensus 2023 EPS estimates move halfway towards our top-down forecast of $239 and the P/E multiple remains constant at 17x, the implied index level would be 4165. In a recession, if the EPS estimate moves halfway to $200, a 14x P/E would bring the S&P 500 to 3150,” Kostin wrote in a note.
