There was an interesting reaction on equity indices to Friday’s stellar Nonfarm Payrolls report. After the US jobs data smashed expectations across almost every component, US bond yields and the US dollar spiked higher. Equity markets were far more cautious. However, this caution is coming around key resistance levels. This resistance leaves markets open to another phase of near term corrective pressure. 

  • The prospect of the Federal Reserve being pushed towards tapering asset purchases could weigh on US growth stocks and in turn drag Wall Street lower
  • S&P 500 showing a familiar creep to all-time highs, something that has historically been followed by a corrective slip.
  • DAX and FTSE 100 are at key range resistance again.

Tech stocks would not favour a hawkish Fed

Since the Federal Reserve signalled in June that tighter monetary policy was coming forward within the projection horizon (for the Fed that is by 2023), we have seen the performance of US growth stocks soar. The chart below suggests that of the two main segments of the US stock market, the tech stocks are the key driving force behind recent all-time highs of the S&P 500.

Growth stocks (represented by the tech-heavy NASDAQ) are far outperforming value stocks (represented by the Russel 1000 Value ETF).



In other words, without the US tech stocks, Wall Street would be stuck ranging sideways. However, in the wake of the hugely impressive US Nonfarm Payrolls report, bond yields have started to rise once more. Growth stocks do not tend to perform so well when bond yields are rising. Historically, the NASDAQ has a strong negative correlation with US bond yields.



Subsequently, if real yields begin to move higher due to more confidence that the Fed will begin to tighten monetary policy towards the end of this year, this might be an excuse to lock in profits on some strong gains on NASDAQ. If this happens, then by extension, it could also weigh on Wall Street.


Subsequently, if real yields begin to move higher due to more confidence that the Fed will begin to tighten monetary policy towards the end of this year, this might be an excuse to lock in profits on some strong gains on NASDAQ. If this happens, then by extension, it could also weigh on Wall Street.



Interestingly though, this new all-time high on S&P 500 came as the tech-heavy closed -0.5% lower on the day. If tech stocks begin to slip back, the S&P 500 is unlikely to prevent a similar move. 

For the S&P 500 futures (MT5 code: SP500ft) we are seeing tentative technicals. Momentum is not bursting higher, instead, the Relative Strength Index (RSI) is struggling around the mid-60s again.

A move below 4390 near term support would begin to generate corrective momentum and open a test of 4365. The rising 55 day moving average is a strong gauge for near term corrections and is currently down at 4297, c. -3% lower.



DAX & FTSE hitting a ceiling of resistance

If US equities are hit by profit-taking, a similar fate is likely to hit European markets. The DAX and FTSE 100 have both hit key resistance levels recently and are struggling to breakthrough. We continue to see both markets trading in multi-week ranges and even if there is an attempt to break through the ceiling, we do not believe that it will last.

The German DAX (MT5 code: GER30) failed above 15,800 on Friday and has had another attempt on the resistance this morning, only to back away again. The RSI is again faltering under 60 and we believe that ranging conditions persist. A close back under 15,700 would likely see a pullback into the middle of the range around 15,400 once more.



The FTSE 100 (MT5 code: UK100) has also rallied recently, however, seems to latterly be struggling as 7150 resistance approaches. Once more, this struggle around resistance is hitting as the RSI momentum is fading under 60. Again this points towards a continuation of the broader trading range 6800/7200. The risk would therefore be a retreat once more towards 7000 area.



Conclusion

Markets are still to settle down following the payrolls report, however, there is potential for profit-taking on equities. Coming around key resistance levels, this temptation could grow.