S&P 500 analysis: China’s stimulus push drives markets near overbought levels

S&P 500 analysis: It has been another risk-on day in the markets so far in this first half of Thursday’s session, especially for China where stocks have stormed higher amid all the stimulus efforts by the government. This has also helped to boost the appetite for China-linked assets including copper, silver and other base metals, as well as China-linked stocks – plenty of which found in major European indices like the DAX, which, along with US futures and gold, has hit a new all-time high today. So, the stock market rally continues to gather momentum as we approach the end of September, pushing major US indices, which were already outperforming, to near overbought levels ahead of Q3 earnings and the US elections. While some profit-taking may be expected, there are currently no strong bearish signals to suggest that a market top is imminent. In fact, investors are apparently finding more reasons to stay invested or even increase their exposure, as central banks not only ease interest rates but also introduce fresh stimulus measures.

China's major stimulus boosts global markets

China is stepping up its efforts to combat its slowing economy by pledging significant fiscal spending aimed at meeting its growth targets. Reports indicate that the Chinese government may inject up to 1 trillion yuan into its largest state-owned banks to expand their lending capacity. This move comes after the Chinese central bank introduced its most significant stimulus package since the pandemic earlier this week. The combination of China’s aggressive stimulus measures and easing monetary policies from central banks worldwide has fuelled optimism among stock market bulls.

Fed’s expected rate cuts are being priced in

In the US, the Federal Reserve cut interest rates last week, following the lead of other central banks, signalling the potential start of a broader rate-cutting cycle. Currently, markets are pricing in a 62% likelihood of a 50-basis point rate cut at the Fed’s November meeting, which continues to support bullish market sentiment. However, incoming data will impact those probabilities, which means the Fed may go ahead with a smaller cut than expected. What’s more, the Fed’s expected efforts are being priced into the markets, which means further sharp gains might be difficult to come by – especially if growth concerns intensify. Ultimately, company earnings and forecasts may not be as optimistic as the markets, which means the risk of a correction is high.

Key US data to watch this week

The focus will remain on labour market data. Traders will closely monitor the US jobless claims data and Fed Chair Jerome Powell’s upcoming speech for additional clues on the direction of interest rates. Today’s macro calendar is actually quite packed, with the final estimate for Q2 GDP and durable goods orders set for release alongside jobless claims. Several other Federal Reserve officials, including Collins, Kugler, Bowman, Barr, Cook, and Kashkari, are also due to speak, providing further insights into the Fed’s policy outlook.

Here is the economic calendar for the rest of this week:

S&P 500 technical analysis: key levels and factors to watch

Our technical S&P 500 analysis suggests that the index may be due a correction rather soon. For now, though, we haven’t seen any bearish reversal signals. Indeed, it has experienced a remarkable rally, with dip-buyers stepping in at every potential peak to drive the index to new highs. While a sharp sell-off is inevitable at some point, for now, the bulls remain in charge.  

There are now several key technical levels that could serve as support in the event of a market pullback. The most immediate short-term support lies around the 5735 mark, where the index encountered resistance before breaking out today. Below this level, the next significant support zone is at 5670, the previous all-time high from mid-July. Further down, 5613 marks another important level to watch. A drop below these key zones could signal the beginning of a bearish trend, but for now, the bullish momentum remains intact.

On the upside, if the rally continues, the next target is the 5827 level, which corresponds to the 127.2% Fibonacci extension of the last significant downswing observed in mid-July.

S&P 500 analysis: profit-taking potential in Q4 as momentum peaks

As we approach the end of Q3, the S&P 500 looks set to post its fifth consecutive monthly gain unless a sharp decline occurs within the next few trading sessions. The index has rebounded from early September weakness, climbing nearly 7%, bolstered by the Fed’s rate cut, China’s stimulus measures, and dovish signals from other central banks.

Since bottoming out in October 2023, the S&P 500 has gained an impressive 40%, with the index up a massive 65% from its October 2022 low. From its post-Covid low in March 2020, the index has surged a staggering 165%. However, with such strong momentum, some indicators are signalling overbought conditions.

While the daily Relative Strength Index (RSI) remains just below the 70.0 threshold, the monthly RSI has crossed above 70.0, reaching its highest point since January 2022. Historically, such readings have preceded multi-month bear trends, but even greater overbought levels were reached in recent history – for example, in August 2021, September 2018, and January 2018 – without immediately triggering significant downturns. Although an overbought RSI is not necessarily a sell signal, it serves as a warning that a correction or consolidation could be looming, especially as we move into Q4 with the US elections and Q3 earnings on the horizon.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R