S&P 500 hits fresh record but rally at risk of sharp reversal

FUNDAMENTAL OVERVIEW

Despite underlying strains, the S&P 500 climbed to a fresh all-time high on Wednesday. A notable divergence has emerged in market breadth, yet a more significant one involves US credit spreads, which have been expanding noticeably.

Credit spreads serve as a valuable gauge of financial conditions and risk appetite. An improvement in growth expectations leads to tighter credit spreads and a positive shift in risk sentiment. Conversely, a worsening of growth expectations causes credit spreads to widen and risk sentiment to turn negative.

Since credit spreads typically move ahead of equities, the latest advance may be unhealthy, leaving a high probability of a swift reversal.

The standoff between the US and Iran persists, with supply disruption risks still overriding any improvement in actual exports. Additionally, Iran has pledged to shortly shut down the so-called "illegal" passages in the Strait of Hormuz, a move that could drive oil prices up.

With a sparse economic calendar this week, attention will stay on US-Iran events. Next week, the US CPI release is due, and if the figures exceed expectations, it could prompt a hawkish repricing and pressure markets.

S&P 500 TECHNICAL ANALYSIS – DAILY TIMEFRAME

The S&P 500 (CFD) rose to a fresh all-time high in the previous session despite macroeconomic and geopolitical headwinds. Should a pullback occur, buyers are expected to support at the trendline, with a clear risk underneath, aiming to drive further highs. Conversely, sellers will be looking for a downside break to extend losses toward 7,500, with 7,600 as an initial objective.

S&P 500 TECHNICAL ANALYSIS – 4 HOUR TIMEFRAME

S&P 500 TECHNICAL ANALYSIS – 1 HOUR TIMEFRAME

On the hourly chart, a slight descending trendline outlines the ongoing retracement. If price rebounds from support and retests the trendline, sellers are likely to step in with a defined risk above, aiming to press to new lows. Buyers, meanwhile, will be watching for a break above to add to bullish positions and target fresh records.

UPCOMING CATALYSTS

The FOMC meeting minutes are due today. Tomorrow brings the latest US jobless claims data. Friday ends the week with the University of Michigan consumer sentiment survey.