SPDR S&P 500 ETF Trust (SPY) Forecast: Can we still rally?

• S&P 500 closes the week sharply lower as the jobs report causes a sell-off.
• SPY still finished the week over 1% higher due to a strong Monday and Tuesday rally.
• Energy (XLE) is once again back at the top of the charts.

A volatile week, they all seem to be at present, as Monday and Tuesday's massive rally was nearly totally reversed on Friday. Hopes for a Fed pivot had seemed misplaced, but equity investors took the bait and chased risk assets higher in the earlier part of the week. That then saw some profit-taking and position squaring ahead of Friday's big jobs report. Volatility once again picked up as the economy refuses to roll over, and so the Fed will have to inflict more pain. Already we see risk of financial contagion in bond markets, and worries are increasing that we may have a systemic black swan type of collapse somewhere. Already we had the Bank of England stepping in to support its bond markets due to some interesting leverage positions in the pension industry. Now investors are beginning to wonder where the next problem may arise. All this is leading the dollar higher as investors yet again rush to safety.

SPY news

The equity rally on Monday and Tuesday was already under threat once OPEC+ announced their supply cut. The headline 2 million barrels per day was higher than what had been expected, and this led oil prices back above $90. That gave any hopes for a Fed pivot a slight pause for thought, and then Friday's jobs report put any hopes of a Fed pivot to bed. Yields rose sharply as the US economy sees continued strength in the labor market. Equities fell sharply.

Now investor focus will shift toward earnings season and Thursday's CPI release. There may be some hope for the CPI print as last week's spike in oil prices will not have an impact and prices have been falling across other commodities. Housing-related costs are also looking like they are rolling over. Earnings season kicks off later in the week with the big banks first up. Earnings season revolves around one company – Apple (AAPL). Once that goes, they all go. However, we see some signs of a reverse rally akin to the June rally. Conditions look eerily similar. 

First, corporate buybacks will restart once the earning season is over. CTAs will be forced to buy aggressively on any rally. Hedge funds are overly short, so a rally may squeeze them. The sentiment is terrible with most indicators showing close to max bearish. This is often a contra indicator. Also, seasonality cannot be dismissed. October is traditionally a positive month and even more so ahead of midterm elections. That is not to say equities cannot fall, but in my view the risk-reward is skewed higher.

SPY forecast

Friday's sell-off may have put some doubt into investors looking for a rally. The move was sharp. Once again we look to test the 200-week moving average. So far so good on that test. Abreak will look to support at $352. This would be a 50% Fibonacci retracement from the pandemic low to the high, so we do have strong technical support nearby as well as the potential rally argument made above. The pivot remains at $373 in my view. Breaking above should see a test of $388.

SPY daily stock chart