S&P 500 Holds the Lows – But For How Long

As the market grapples with an exceptionally high level of uncertainty, the most common pattern in stock charts hints at what is likely to come. A few months ago, a CPI report showing a 2.8% annual increase would have triggered widespread buying. However, lately, investor concerns have shifted, and the favorable inflation report led to a rather mediocre market response. As a result, the rallies in stocks and bonds following the release quickly faded. Still, the stock market managed to avoid new lows on Wednesday. The S&P 500 recorded modest gains, trading sideways for most of the day and holding up against Tuesday’s lows. Investors latched onto the idea that inflation is slowing due to weaker consumer demand. Technology stocks performed better as retail investors bought some of the Mag7 favorites like Tesla and Nvidia. The Volatility Index (VIX) dropped by 10%. The Canadian dollar surprised, leading among G-10 currencies, even on a day when the Bank of Canada cut interest rates by a quarter point and the finance ministry announced a countermeasure worth 30 billion Canadian dollars against the U.S. The strengthening of the currency can be explained by one key factor: hawkish tones in the Bank of Canada’s statement. The yield differential between the U.S. and Canada confirmed the resilience of the Canadian dollar. Better-than-expected CPI data raises concerns about stagflation and strengthens expectations for rate cuts by the Fed, but now the market is more worried about the impact of tariffs on inflation, as well as the risks of slowing economic growth.

An additional complication is that weak market movements have caused significant technical damage. Markets that have experienced such a crash do not recover quickly. Many investors are concerned about the long-term health of the market and will use any upward movement to reduce their exposure to stocks. Currently, the most common pattern in the stock market is a sharp drop followed by a weak two-day recovery. This pattern suggests that another test of the lows is likely, rather than a sharp V-shaped recovery. The market continues to struggle with high uncertainty, keeping volatility elevated. Thursday’s session may take a completely different tone as the Producer Price Index (PPI) has the potential to shift the narrative from disinflation in the CPI – and affect the Fed’s preferred inflation gauge, the core PCE deflator. The PPI report is expected to show that core PCE inflation remained stable in February, with an estimated annual increase of 2.71%. Unemployment claims data could signal public sector layoffs. On Friday, the University of Michigan’s consumer confidence report will also be released. Investor sentiment will be particularly important given recent market moves and the economic uncertainty President Trump is creating. The good news is that the slight recovery on Wednesday is the first step toward building support on the charts. A clear bottom has already formed, which could serve as potential support. If this level is tested and holds, the chances of a new upward trend will improve.