US Stocks Sink as Yields Soar, S&P 500 Carves Out Bearish Double-Top Pattern

S&P 500 Outlook:

• Standard & Poor’s 500 Falls as US Treasury bond prices skyrocket after strong US economic data
• Strong data on private sector payrolls and service sector activities reinforce expectations of further monetary tightening
• The S&P 500 appears to be patterning a double top pattern. If confirmed, this technical formation could herald losses for the stock index

Most read: Q3 Top Trade: S&P 500 vulnerable to decline due to weak fundamentals and frothing markets

US stocks were undervalued on Thursday due to a surge in US yields, which rose sharply across the Treasury curve. For example, the two-year note rose above 5.0% and briefly reached its highest level since 2007. Meanwhile, the 10-year note broke above 4.0%, which is close to the March high.

US productivity curve

source: TradingView

The movement in interest rates was driven by the strong US economic numbers. Earlier in the session, the ADP report showed that private sector employers added 497,000 jobs last month, much higher than expectations of 220,000 jobs, in a sign that the labor market is still very resilient and still operating at full capacity despite the current situation. Aggressive Fed.

The ISM Services PMI results also surprised to the upside, defying the dismal narrative prevalent in the financial media. According to the survey, the non-manufacturing sector index rose to 53.9 from a previous 50.3, beating consensus estimates for a more modest rebound to 51.00.

A snapshot of US economic data

source: DailyFX Economic Calendar

Taken together, the latest batch of data has boosted expectations for further monetary tightening, boosting bets for a quarter-point hike at the July FOMC meeting and increasing the likelihood of a similar move in September. If this scenario occurs, the upper limit of the federal funds rate could peak at 5.75%, a level unseen since 2001.

The chart below shows how the 2023 interest rate outlook has shifted in a more hawkish direction as evidenced by the implied returns of the fed funds futures contract.

2023 Term Funds Implied Returns

source: TradingView

Against the current backdrop, S&P 500 futures fell about 1.15% in early afternoon trading, retreating for the second day in a row after failing to remove overhead resistance at 4,500. With higher nominal and real yields, stock valuations are becoming less attractive, so the biggest pullback could be Just around the corner.

At the same time, bond yields reached, and in some cases, exceeded their peak in the first quarter, when the banking sector crisis erupted. A similar episode could play out again soon if rates stay high for too long. This may explain why banks sold off across the board on Thursday.

In terms of technical analysis, the S&P 500 appears to be forming a double top as shown on the daily chart below. The double top is a reversal pattern consisting of two similar tops separated by a decline that develops repeatedly in the context of an extended move higher.

This bearish setup is confirmed once the price completes its “M” formation and breaks below the neckline, which is the technical support generated by the intermediate bottom of the formation.

In the case of the S&P 500, the neckline is around 4,365. On this floor, sellers may dare to attack 4275, followed by 4250. The last level represents the potential volume of the downward movement predicted by the double top, which is obtained by projecting the height of the pattern vertically from the breakout point.

S&P 500 future technical chart

S&P 500 futures chart created with TradingView