Will Stocks Have Another Big Leg Lower? Raoul Pal Flags This Chart To Suggest Otherwise

Zinger Key Points
  • The inflation-induced rally didn't have enough momentum to take the S&P 500 Index past its previous peak in mid-August.
  • Raoul Pal thinks the market has priced in an extreme recession.
Will Stocks Have Another Big Leg Lower? Raoul Pal Flags This Chart To Suggest Otherwise

The equity market flattered only to disappoint. After tame October inflation data sent stocks higher, traders have stepped back to the sidelines among lingering macro concerns. An economist, however, thinks it can’t get any worse for stocks.

What Happened: The Nasdaq 100 Index, comprising non-financial, predominantly tech stocks listed on the namesake exchange, is currently pricing an Institute for Supply Management’s purchasing managers’ index reading of 38, economist Raoul Pal said. This reading corresponds with a deep recession, he said.

The view among market participants that equities need to have another big leg lower due to earnings is already priced in, the economist said. Pal’s view implies that a steep downside from current levels is unlikely.

Why It’s Important: The S&P 500 Index has been on a downward spiral since the start of the year. The index hit a bottom of 3,636.87 on June 17 before rallying back up. It then hit an intermediate peak at 4,325.29 on Aug. 16 before beginning another downtrend, this time bottoming at a 52-week low of 3,491.58 on Oct. 13.

Things began looking up for the market thereafter, thanks to better-than-expected corporate earnings and optimism among traders as we approach the seasonally strong year-end. The S&P 500 rebounded from the mid-October low but topped out at 4,028.84, with the upside during the intervening period also reflecting positive investor reaction to October producer and consumer price inflation data.

The rally has petered out yet again amid indecision.

All hopes now hinge on the mid-December Federal Open Market Committee meeting and the customary Santa Claus rally.

Price Action: The SPDR S&P 500 ETF Trust SPY fell 0.31% on Thursday before ending at $394.24, according to Benzinga Pro data.

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Posted In: Federal Open Market CommitteeInflationNASDAQ 100Raoul PalS&P 500Santa Claus RallyNewsMarketsTrading Ideas