A majority of the capital market players are hoping that a Federal Reserve rate cut today will be enough to spark another rally for the S&P 500. However, global investment firm Morgan Stanley says that another S&P 500 breakout could be nothing more than wishful thinking.
The index reached an all-time high last Friday, pushing past the 3,000 mark, but the high-pitched sound of steam rushing through a small hole is what technical analysts at Morgan Stanley are hearing. In short, sustaining the rally will be a trying task.
“While our 2400–3000 call from 18 months ago may look vulnerable, we think this latest surge will fail again, as we don’t expect a Fed cut to rekindle growth the way market participants may be hoping, and now pricing,” said Mike Wilson, Morgan Stanley’s chief U.S. equity strategist and chief investment officer, in a note to clients Monday.
In the past year and half, anytime the S&P 500 rallied close to or above this 3,000 mark, a market correction ensued. The central bank is expected to implement a rate cut of 25 basis points, but that may not be enough to sustain the rally.
Wilson also cited that trade wars, languishing domestic investment and less-than-stellar earnings could put further downward pressure on the S&P 500.
“Big disappointments in capital spending and business surveys suggest growth could slow further in 2H,” Wilson said.
“We remain of the view that the consensus S&P 500 earnings forecasts are still materially too high for both the second half of 2019 and 2020 and think the Fed’s expected rate cut next week should not be celebrated if it is accompanied by an earnings and possibly economic recession,” he added.
As such, traders can look to the Direxion Daily S&P 500 Bear 3X ETF (NYSEArca: SPXS) for a leveraged inverse play.
As investors anticipate a global economic slowdown, trade wars, and now weaker-than-expected earnings, it could be stoking the fire for more gains for bears. Ahead of the start of second-quarter earnings, data compiled by Bloomberg showed that over 80 percent of S&P 500 companies who revised their profit estimates are expecting weaker-than-expected earnings.
Of the companies that have reported their second-quarter earnings, over 30 percent of them cite trade wars as the focal point of downward pressure.
SPXS seeks daily investment results equal to 300 percent of the inverse of the daily performance of the S&P 500 Index. The fund, under normal circumstances, invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse (opposite) or short leveraged exposure to the index equal to at least 80 percent of the fund’s net assets (plus borrowing for investment purposes).
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