Can the S&P 500 and the Nasdaq build on their great start to 2023?

US stock markets were in retreat overnight as several Fed Speakers hit the wires to beat the hawkish drums and remind the markets that higher rates will be required for longer to bring inflation down.

• Federal Reserve Governor Chris Waller noted that while the US economy was coping well with higher interest rates, inflation “remains quite elevated, and so more needs to be done”
• Federal Reserve Bank of New York President Governor Williams noted that interest rates are "barely into restrictive" territory
• Federal Reserve Governor Cook said, "we are not done yet"
• Federal Reserve Bank of Minneapolis President Neel Kashkari said that while the Fed doesn't want to cause a recession, "we have a job to do"

The chorus of hawkish Fed speak (along with some woes for Google’s AI chatbot Bard) prompted the market to unwind yesterday’s post-Fed Chair Powell relief rally after he elected not to signal a more aggressive stance towards future rate hikes after last week’s red-hot labour market data.

The S&P 500 sits just a fraction over 2% above the levels it broke higher from on the 23rd of January. It is not exactly the type of melt-up typically expected in a new bull market or from a stomach-churning short squeeze, creating uncertainty around where to from here.

More so as the release of the red-hot US jobs data last week has significantly reduced expectations of a hard landing or, for some, any landing at all. As such, we think the currently stuttering rally in the S&P 500 and the Nasdaq can take another leg higher.

S&P 500 technicals

After reaching and breaching the initial upside target, the December 4180 spike high mentioned in this article here from January 24th, we continue to expect the rally (which we view as counter-trend or corrective) to reach the August 4327 high before fading.

A sustained close back below the 200-day moving average and uptrend support currently around 3950 would confirm the rally from the October lows has been corrective, it is complete, and the downtrend has resumed.

S&P 500 daily chart

Nasdaq technicals

After reaching and breaching the December spike high at 12,239, we continue to expect the rally to reach the August 13,740 high.

Admittedly the rally in the Nasdaq from the October lows had taken on more impulsive characteristics over the past five weeks similar to the one in June last year before it eventually turned lower.

A sustained close back below the 200-day moving average of ~12,000 would confirm that the rally from the October lows has been corrective, it is complete and the downtrend has resumed.

Nasdaq daily chart