Weekly Summary: Recovery of S&P 500 Cut Short by Inflation

This trading week is ending in the opposite direction of what it started. Instead of continuing on with its recovery, the S&P 500 broad market index is now performing a 5% weekly dive. A very painful blow as the index is now targeting downside targets at 3700-3750 points.

Such a sudden and unexpected wrecking has not been seen for a while in the market. Instead of inflation slowing down in the United States  it is now seen to be resuming its upside march. Most investors fairly considered that the decline of oil prices, seemingly major inflationary drivers, by 16% in July and August would slow down inflation and push down other inflation components. The reality turned out to be much more brutal as Core CPI that excludes food and energy prices rose 0.6% month-over-month in August, much higher than the previous 0.3%, and by 6.3% year-over-year from the 5.9% a month before.

As the Federal Reserve (Fed)  considers the Core CPI i as a major factor when it comes to making its interest rate decision, it may have no other choice but to continue with rapid interest rate hikes. The choice that the Fed is faced with now is to raise the rates by 75 or a massive 100 basis points. Both options, together with the downsizing of the Fed’s balance sheet by selling $95 billion of bonds per month, are more than enough to crash the stock market. It is time to consider restoring short positions of 50% of the targeted volume on the S&P 500 index that were closed last week. 

Brent crude prices went down to $90-91 per barrel after a few upside attempts to $96 per barrel. Crude prices are going down exactly as they should in according with the aggressive downside scenario with primary targets at $75-85 per barrel and extreme secondary targets at $50-65 per barrel that could be reached by November. 

Gold prices deteriorated amid a strengthening Greenback and rising yields on the U.S. debt market. The last frontier at $1680-1700 per troy ounce that guarded gold prices from going further down has  now been breached. So, bullion prices continue to slide towards targets at $1350-1450 per ounce. Short positions were opened at 25% of the targeted volume from $1730 per ounce, and now a bounce back to $1680-1700 per ounce that may happen next week would offer a good opportunity to increase these positions.

EURUSD lost all of its upside gains after inflation data in the U.S. was revealed and changed its formation to the aggressive downside with primary target at 0.97000-0.98000. Thus, aggressive short positions from the current 0.99500-0.99700 levels would be interesting to consider. 

GBPUSD has also lost its gains and dived towards the primary target at 1.12500-1.13500. But these targets are very close. Thus, no good entry points for the trade can be seen.