At the beginning of August, the S&P 500 and the Nasdaq 100 Loose Momentum. Is the Rally Over?

Aug 02, 2022


lAt the beginning of the month, the S&P 500 and Nasdaq 100 loose ground, snapping a three-day winning streak.

lManufacturing activity increased at the slowest rate in two years in July, indicating that the economy is still cooling.

lThis week's stock market's major price action catalyst will be the release of the U.S. nonfarm payrolls report.

At the beginning of August, U.S. equities were muted due to a somewhat cautious atmosphere on Wall Street due to the previous significant upswing in the market. The S&P 500 lost 0.28 percent to 4,119 following all the gyrations of the trading session, lingering close to a crucial technical resistance zone and breaking a three-day winning streak. While the Nasdaq 100 dipped 0.06 percent to 12,941, the technology sector's fall was curbed by a decline in Treasury yields.

While the equity market's upward momentum seems to be slowing down, this is likely a brief break from the recent record gains. To put things in perspective, stocks rose last month, with the S&P 500 posting its third-best July ever with an increase of 9.11%. From a seasonal perspective, this can be good news for immediate returns. However, past results do not guarantee future outcomes; based on data from 1928, when the index increases in a "midterm year" in July, August is typically up 77% of the time.

Putting aside other drivers, the economy is still weakening, increasing the likelihood of a recession and clouding the outlook for risky assets like equities and cyclical commodities. This view was supported by July's ISM manufacturing data, which showed the weakest rate of growth in factory activity in the previous two years.

There was a bright spot in the July ISM survey, although decreased manufacturing output is worrying considering that the sector makes up about 12% of the U.S. GDP. According to the report, the gauge of costs paid for materials used in the production process fell 18.5 points to 60.0, the fourth-largest drop in history. If sustained, declining input prices could result in lower CPI figures in the upcoming months.

Although significant risk events on the economic calendar are worth paying attention to, such as the July nonfarm payrolls report due for release on Friday, the earnings season will continue to take center stage this week. Despite being a lagging indicator, the employment survey can shed important light on the state of the labor market and hiring trends in the face of sharply declining economic growth.

Technical analysis of the S&P 500

A hint that market confidence may be improving is the S&P 500's robust recent rally, which has seen it rise more than 13% from its June lows. The index appears to be moving toward the 4,160/4,175 range, a crucial ceiling playing after the most recent increase. The 200-day moving average and channel resistance, both located around the 4,300 level, may be approached if buyers can firmly overcome this barrier in the near term.

On the other hand, if sellers come back and trigger a bearish reversal, an initial resistance is seen at 4,065. Traders should be ready for the prospect of a pullback towards 4,065, close to the 50-day simple moving average if this floor were to be taken out.