The Standard and Poor’s 500 index is a widely followed indicator of the general direction of the US stock market, and by extension, global equity markets.
The reason for the wide following is clear. The S&P 500 comprises 505 common stocks and covers 80% of the American equity market on a capitalization basis.
However, so far this year, the S&P 500 index has had wide intra-day ranges but has gone practically nowhere. It finished the fist week of the year near 2277 and at 2275 in the second. It finished last week near 2274.
The technical indicators are not generating clear signals with the 30-day moving average being tested over the last 4 sessions but not broken.
The prospects of business-friendly policies from the Trump administration may be helping to support the market , while fear that much of the good news has already been discounted in the market has tempered enthusiasm for new buyers.
It’s our view that this indecision pattern will be resolved as the US earnings season moves into its second full week. At this point, the risk remains asymmetrically to the downside on weaker earnings reports, versus the upside potential on better-than-expected reports.
Political events and Central Bank policy moves have been driving global financial markets over the last two months. During this time, direct influence from weekly economic data seems to have diminished. With dealing desks starting to thin and investors looking to the holidays, this is likely to remain the case over the next two weeks.
But even as financial markets slip into holiday mode, there are several powerful trends that are worth watching. Three of these trends have been particularly vigorous: The USD climb against the JPY, the rise in the US 10-year yields, and the rally in the SP 500 have all been very robust. In fact, these three markets have risen six weeks in a row and finished higher over nine of the last 11 weeks. Similarly, the USD Index and US 2-year yields have risen, while Gold has fallen, in seven of the last 11 week.
The key issue now is whether these trends will be extended, or if a profit taking phase will be seen into the end of the year. Arguments that these trends have gone too far too fast are now several weeks old. And even though technical readings are even more overstretched, there aren’t reliable fundamental arguments for taking aggressive positions in the opposite direction……….not yet, anyway.
The basic psychology of these recent trends suggests the new US administration will act swiftly to enact a comprehensive (fiscal) stimulus package; which will allow US stock valuations to expand and the US Dollar to appreciate vis-a-vis higher domestic interest rates.
On balance, we expect the current trends of higher US stocks, firm US Dollar and a steepening yield curve to continue, even as market flows edge into holiday mode.