US500 (S&P500) Corrective Cycle Considerations

News that the US Senate has approved the USD2tn stimulus package – that was in limbo for a while due to partisan disagreements – bolstered market sentiment overnight with the S&P500 posting a 17% three day gain. The bill is now in the House for reconciliation, with a vote set on Friday. Thereafter, it would await Trump’s signature to be officially a done deal. Over $530bn is allocated as aid to businesses and municipalities, with $61bn for airline industries. $290bn is for direct payments to families; $1200/adult and $500/child. Meanwhile, over $125bn will go to boost the healthcare sector. Market reaction was ebullient, with S&P500 up over 6%, with the first three day gaining streak since February. UST 10y yield saw a mild decrease of 2bps. 

The positive market movement came despite dire US data, where the labour market is showing signs of deep pains from the viral outbreak. Initial jobless claims for the past week were a dire 3.28mn, compared to 282k the week before. While Treasury Sec Mnuchin said the data is “not relevant”, it would not feel that way for many who are newly jobless as America struggles with the viral outbreak. The number of confirmed cases in the US has surpassed that of China, in part due to a large jump in infections in the New York area. 

Overall, for now, despite obvious ongoing challenges in the fight against the viral outbreak, market sentiment should remain bolstered by policy actions. On that note, Fed Chairman Powell did a rare interview on TV, trying to convince the Main Street that the central bank would not run out of ammunition. Market will be digesting the news of the massive second stimulus package from Singapore, as well, with an unprecedented SGD48bn thrown in, on top of the already-considerable 6.4bn announced just five weeks ago. Together, the measures constitute 11% of GDP; a fiscal bazooka might sound like an understatement in this case.

From a technical & trading perspective the S&P500 appears to be developing an impulsive move higher from the 2455 low.. However the preferred scenario at this point is for additional corrective upside to play out also note the monthly close and the defense of the 11year bullish trendline. UPDATE the short squeeze continues, the current pause could see an equality pull back to the mid 2400’s (as late longs will likely be reluctant to hold too much risk on their books heading into the weekend) from here we could see another leg higher to test the equality and 50% retracement confluence at 2800, this will likely be a significant decision point for the market a strong reaction here would suggest the corrective cycle is complete setting up a retest of the panic low and a potential undercut. If buyers can successfully defend the 2400 area then we may see an additional leg higher targeting 3000. From a flow perspective the anticipated month end pension fund rebalancing noted by Goldman Sachs is also noteworthy

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