Are US Indices Signaling a Recession?

How is the US market dealing with the continued poor performance of the CPI (consumer price index), inflation, employment trends, and other negative economic news? Amid a vast wash of generally terrible developments, it appears that the major US-based stock indices like the S&P 500, DJIA, and NASDAQ have not yet reached a bottom. However, that is a subjective view, and individual traders should analyze the numbers before deciding for themselves.

As Q4 gets set to begin, the Ukraine-Russia war, international supply chain problems, domestic inflation, higher interest rates, and an extremely volatile securities market are at the root of trouble for the United States financial environment. What are the index readings saying about the state of the national economy? The following discussion includes pertinent facts for everyday traders and investors who want the latest objective information about the ups and downs of the entire marketplace, not individual prognostications about particular corporate shares.

The Big Picture

In one sentence, an objective viewer might sum up the US financial outlook this way in that most of the relevant data is negative, but markets have probably not yet reached their bottoms. It’s actually a case of bad news wrapped in bad news. Fuel prices pulled back a bit in Q3, but inflation remains high. The oil price decline could revert to additional upward surges at any time, especially with the continuation of the European war between Russia and Ukraine.

Relative Strength Index (RSI) in Oversold Zone

Why is the RSI indicator such an essential piece of the analysis puzzle for traders and investors? The relative strength index is one of many indicators that aims to measure whether a given asset class’s pricing has bottomed out or reached a peak. In theory, once there’s a bottom, the next big move will be upward. Vice versa for a top. Notably, RSI can be used as either a technical or fundamental tool, with both experts and amateur investors employing it to determine when to get into or out of a position.

Exchange traded funds that track the S&P 500, called SPY, are usually a good barometer of how the overall market is performing. In late September, FX Street News pointed out that the current state of the S&P 500, the primary bellwether of the US securities markets, RSI, “has moved into classic oversold territory,” meaning that prices have nearly reached a bottom. However, it’s important to remember that RSI can stay in this range for a very long time, so a low reading does not necessarily indicate a turnaround or even a return to a bullish trading cycle.

S&P, Dow, and NASDAQ: Recent Action and Possible Year-End Moves

After a whole year, in 2021, of positive movement, the much-watched S&P 500 began to go sour in January 2022. From there, it fell from above the 4,500 mark to the 3,800 level by September. That was after a brief blip up in August and before the horrible CPI news of mid-September broke. The data revealed strong inflationary pressures as well as other troubling fundamentals in the economy. Technical indicators are showing that the major index could drop well below 3,500 before the year is over. What about the other barometers of the USA’s economy? With DJIA, the story has been pretty much the same, with a great 2021 followed by an awful 2022, which saw the Dow tumble in a linear fashion from January onward, interrupted by a brief increase in August.

Technical analysis points to a value below 28,000 by December. As for NASDAQ, it was almost at the 16,000 level in November of 2021 but did the same dance as the other indices during 2022’s early months. Now sitting at 10,829 for the Composite value, it’s possible that the tech-heavy NASDAQ could fall almost to the psychological pivot point of 10,000 by the end of Q4, which it hasn’t seen since mid-2020. It’s significant to note that all the important indicators of the overall economic picture are not only in negative territory but are posting numbers similar to those that appeared at the height of the COVID pandemic in mid-to-late 2020 when most global economies were in a tailspin of collapse. Now that the pandemic of all but over, it’s hard to explain how the United States financial sector got into such a downward spiral.

Recession is a Likely Scenario

All the index-based technical numbers and fundamental factors point to a recession. When it might arrive is unclear, but investors should note that not a single significant component of the US economy is performing well as 2022 draws to a close. In late September, stocks came back from a nearly two-year low and posted four straight days of gains. But the upswing could not last as both the S&P 500 and DJIA (Dow Jones Industrial Average) fizzled before notching a turnaround. Officially, the Dow is bearish in late Q3 because it meets the definition of that term: falling more than 20% since the beginning of the year. Likewise, the Standard & Poor’s index fell to a fresh low since mid-summer. In related movement, the benchmark tech measurement, NASDAQ, dropped by just more than one-half of one percent for the final week of September.

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