What’s Happening?

An incredibly quiet two month period for SPX has come to an abrupt end with stocks falling out of bed over the past couple of days as speculation grows that the Fed really could raise interest rates this month.  It remains to be seen, however, if this is a normal seasonal selloff, a correction within an uptrend of the start of a more significant downturn.

Fed member speeches Monday and a number of key US data indicators later in the week like retail sales and inflation could attract significant traders looking for insights into what the Fed may do at its meeting next week.

Technicals:

After selling off to start the year, SPX completed a double bottom then rallied through to early July. Through the summer, SPX lost upward momentum and consolidated but recently turned downward, taking out its 50-day average near 2,160 and diving back toward 2,110.

So far, the decline has been a steep but normal downswing within a rising channel of higher highs and higher lows. Next key support appears near 2,100 where a 23% retracement of the previous advance and a round number converge. With the RSI already getting oversold, this could potentially contain the selloff. Initial rebound resistance possible near 2,125.

Should support fail, however, a deeper decline would be signalled that could potentially send the SPX back toward the 2,045 to 2,055 area where a 38% retracement and the 200-day average cluster.

Fundamentals:

For most of this decade, trading in stocks have been driven by a combination of earnings expectations and the prospects for easy money from central banks (QE stimulus has tended to follow the path of least resistance into the stock market rather than being put to work in the real economy).

Last week, signs emerged that the big monetary easing cycle may be coming to an end. The ECB didn’t bring in more stimulus as many had hoped and took a neutral stance. It increasingly looks like the Bank of England overdid it on stimulus at their meeting so nothing new is expected at their meeting this Thursday.

This shift away from full on dovishness toward neutrality at some central banks has made it easier for the Fed to take a hawkish shift and raise interest rates. FOMC members have been moving toward favouring at least one rate increase this year, particularly NY Fed President Dudley who switched from the dovish to hawkish camp offsetting and trumping the move by non-voter St Louis Fed President Bullard in the dovish direction earlier in the year.

Late Friday, in another sign the liquidity party may be ending, Fed Governor Tarullo who rarely speaks, wouldn’t rule out a 2016 rate increase even though he has concerns about low inflation. Monday is the last day of FOMC member comments, so far Atlanta Fed President Lockhart called for a serious discussion of a rate hike next week and defended the Fed’s maligned Dot Plot forecasts. Later Monday Governor Brainard makes a speech which could be the DOVES LAST STAND. Her comments are expected to be very dovish, any surprise change in her stance could add to hawkish speculation.

Fed speculation may keep markets active through the week with a number of major indicators due which could yet tip the scales particularly retail sales on Thursday and consumer price inflation on Friday.

News that points toward a more hawkish Fed could send stocks lower while news that suggests the Fed could hold off a bit longer may shore up support.  That being said, hawkish news could indicate a strong economy and support higher corporate earnings expectations while dovish news could imply a weak economy and hurt earnings expectations. Because of this, we could see significant trading swings in both directions around this week’s key events.