S&P 500 OUTLOOK:
- S&P 500 slides but finishes the day off its lows
- The United States and its allies impose heavy economic sanctions on Russia for attacking Ukraine, a situation that weighs on market sentiment
- Dip buyers could begin to emerge as the ongoing military crisis in Eastern Europe may not impact U.S. stocks significantly
The S&P 500 has been on a roller coaster ride in recent days amid rising geopolitical tensions in Eastern Europe after President Vladimir Putin gave the order to begin the invasion of Ukraine last Thursday. The crisis in the region – the worst since WW2- has unleashed extreme levels of volatility in financial markets, making trading conditions very chaotic across all asset classes.
Investor sentiment deteriorated after the United States and its allies levied heavy sanctions on Russia over the weekend to isolate the country from the global economy for its aggression, including banning certain Russian financial institutions from SWIFT and freezing the central bank assets (CBR). Against this backdrop, stocks opened lower on Monday, but managed to claw back some losses on news that Moscow and Kiev have begun negotiations to reach a ceasefire agreement. When it was all said and done, the S&P 500 retreated modestly 0.25% to 4,373, erasing most of the 2.5% decline added at the opening bell.
The U.S. economic calendar is packed with key events this week, including Fed Chairman Powell’s testimony before Congress on Wednesday and Thursday, and the February NFP report to be released on Friday, but the crisis in Eastern Europe may continue to be the center of attention in the near term unless the situation unexpectedly de-escalates.
With the cautious mood on Wall Street, the market will remain unpredictable and at the mercy of war headlines, a scenario that may trigger sporadic selloffs and flight to safety episodes. However, any pullback in the S&P 500 may be temporary for three reasons: 1) U.S. companies have very low revenue exposure to both Russia and Ukraine, 2) the invasion is not expected to derail the global economic recovery, 3) localized military conflicts only tend to damage confidence for a short period of time, often leading to forceful rebounds.
Given how much the S&P 500 has fallen in recent weeks and all the negative priced in, buying on weakness looks attractive from a tactical standpoint, especially now that the current uncertainty may prevent the Fed from being overly aggressive when it begins raising rates next month (the probability of a 50-basis point hike at the March FOMC meeting has fallen sharply and now stands at 10% from 60% two weeks ago). That said, it would not be surprising to see dip buyers step in, paving the way for a solid rebound in the S&P 500 in the coming days (barring, of course, an escalation of nuclear rhetoric between Russia and the West).
S&P 500 TECHNICAL ANALYSIS
From a technical perspective, the near-term bias remains bearish for the S&P 500. For the outlook to improve, we need to see a move above the 38.2% Fibonacci retracement of the 2022 pullback (4,385), but more importantly, the index must reclaim its 200-day moving average near the 4,468 area (cluster resistance). If price manages to climb above these levels, buying interest could accelerate, setting the stage for a rally towards 4,550. On the flip side, if selling activity intensifies again, support is seen at 4,280 and then at 4,225, but if both floors were to be taken out decisively, the index could be on its way to retest the 2022 low near 4,117.
S&P 500 TECHNICAL CHART
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—Written by Diego Colman, Contributor