(Bloomberg) — The S&P 500 Index is on a roll, posting its best four-day rally since early July partly on the back of hopes that inflation data due Tuesday morning will show some cooling off ahead of next week’s Federal Reserve meeting.
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The index just snapped three weeks of losses and is now bouncing around 4,110 points, within sight of its 200-day moving average around 4,270. Failure to break — and then stay — above the key technical support level in the aftermath of the inflation report may indicate the market is poised for another leg lower.
That’s what happened last month.
After CPI data on Aug. 10 showed US inflation decelerated by more than expected, the S&P 500 briefly surged to within a hair of its 200-day moving average. But the index then lost steam, failing to recapture that threshold and coming under pressure after a fast rise in Treasury yields rattled growth shares and upended the stock market’s $7 trillion early summer rebound.
The difference this time is that investor positioning is already depressed, which is a contrarian sign, according to Keith Lerner, co-chief investment officer at Truist Advisory Services. “This suggests at least some investors are already braced for bad news and will not need to take aggressive selling action since they are already somewhat hedged,” he wrote in a note to clients.
Meanwhile, US consumer-price inflation is expected to show signs of moderating in August, with CPI forecast to have risen 8% in August from a year earlier versus 8.5% in July, according to economists surveyed by Bloomberg. Another rally could help propel the index above its 200-day moving average for the first time since April.
Read: BofA Says Rally Gains Steam as Rising Percentage of Stocks Climb
If the index can’t break above that, it would be a sign that a counter-trend rally has been unfolding, and the market is poised for another leg lower as the index faces resistance from 4,200 to 4,300, according to Lerner.
Still, major US equity benchmarks have shown some resiliency recently, with the S&P 500 topping its 50-day and 100-day moving averages. A close above its 200-day moving average would be viewed as a potential bullish change in the market’s long-term trend.
Read: BTIG Sees S&P 500 Pressured as Riskiest Time of September Nears
“We expect the markets to remain in choppy waters,” Lerner added. “However, markets do not typically move in a straight line. On a short-term basis, several indicators suggest the selling is getting overdone.”
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The Federal Reserve will deliver another 75-basis-point interest rate hike next week and likely hold its policy rate steady for an extended period once it eventually peaks, according to a Reuters poll of economists released on Tuesday. Policymakers have done little to push back on market pricing for a third consecutive rate hike of three-quarters of a percentage point at the U.S. central bank’s Sept. 20-21 meeting, with inflation, as measured by the Fed’s preferred gauge, running at more than three times its 2% target. A strong majority of economists, 44 of 72, predicted the central bank would hike its fed funds rate by 75 basis points next week after two such moves in June and July, compared to only 20% who said so just a month ago.
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Asian stocks continued a global rally on Tuesday morning, ahead of the release of key US consumer price data that is expected to show slightly slowing inflation in the world’s largest economy.
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STORY: U.S. stocks rallied on Monday, notching their fourth straight session of gains with all three major indexes hitting two-week highs, as investors awaited crucial inflation data due out Tuesday.The Dow rose seven tenths of a percent. The S&P 500 gained a full percent, while the Nasdaq ended more than a percent and a quarter higher.The Labor Department’s consumer price index, expected before Tuesday’s opening bell, is this week’s main event.And Jay Hatfield, chief investment officer for the ICAP ETF, said the CPI report will be heavily scrutinized for any signs of future interest rate hikes from the Federal Reserve.”Right now, consensus for CPI is -0.1%. We’re forecasting a number a little bit lower than that. at 0.2% [FLASH] And I would say the chances of there being a disappointment are rising because we’ve had a pretty dramatic rally into this print. So, I think people are really expecting it to be that number, consensus or better. So if we print higher then that could be bad for the market.”Market-leading mega-caps including Amazon and Tesla provided a lift to the S&P 500, while shares of Apple jumped nearly 4%, days after unveiling updates to its iPhone and Apple Watch. Drugmaker Bristol-Myers Squibb rose 3% following the FDA’s approval of its psoriasis drug late on Friday. Share of rival Amgen, maker of the psoriasis drug Otezla, dropped 4%. And shares of Twitter slipped amid its legal wrangling with Elon Musk, who said in his latest attempt to scrap his deal to buy the company that Twitter’s failure to seek his consent before paying millions of dollars to a former security chief turned whistleblower violated the merger agreement. Twitter called his latest reasoning to back out of the deal “invalid and wrongful.”
Occidental Petroleum shares jumped higher Monday after billionaire investor Warren Buffett added to both his stake in the oil major and speculation that he may be preparing to buy at least half of its outstanding stock. Buffett boosted his holding in Occidental, which he has been adding to for most of the year, to 26.8%, according to Securities & Exchange Commission filings from late last week, after buying an additional 51.99 million shares. The move came shortly after the Federal Energy Regulatory Commission (FERC) said in late August that Berkshire Hathaway’s additional investment in Occidental was “consistent with the public interest”, giving Buffett the nod to purchase “up to 50%” of the oil major’s common shares.