4th February - Can the S&P see past Q4 GDP?
05 February 2013
TECHNICALS:
MONTHLY CONT. CHART
The market is closing in on the ALL-Time Highs where it has failed twice before.
DAILY MAR 13 CHART
The recent break above the Prior Highs at 1415-49 or provides powerful support for the next bull leg.
Bull trend ratchet better on the support given by Prior Highs…..
FUNDAMENTALS:
Since mid-November the S&P has enjoyed a solid rally driven by growing expectations of economic recovery fuelled by the Fed’s beefed up QE policy/bond buying program and improving Labour market data.
And although the market suffered a correction in mid-December as the fiscal cliff debate seemed to be dead-locked, once a deal was done the rally resumed in earnest. Indeed, in recent days the market has made highs not seen for several years, as traders grew increasingly optimistic about not just a US economic recovery, but saw signs of improvement in China and even the Euro zone. Add in the growth-orientated policies of the new Japanese government and equity markets globally were emerging from the cloud of risk aversion and looking decidedly bullish.
However, the markets received a shock this week when US Q4 GDP surprisingly contracted raising concerns about the durability of the US economic recovery and after a similarly weak Q4 GDP report earlier in the week from the UK, traders could be forgiven for having second thoughts about their degree of optimism regarding a global/US economic recovery.
Unsurprisingly the rally in the S&P and in other equity markets paused, but will it go into reverse as traders perhaps re-assess and adopt a degree of risk aversion.?
First we must look at the Q4 GDP report and understand why it was negative. When the Q3 GDP report was released in October 2012 it showed a large inventory build up. Clearly in the absence of a significant pick up in economic activity, such an inventory gain was unlikely to be repeated and ran the risk of acting as a drag on Q4 GDP.
In fact, that has happened as businesses reduced the pace of stock building. But that is only part of the story. Another drag on the Q4 GDP figure was weak government spending, so although personal consumption held up well, it couldn’t off set the weak inventory and government spending components of the Q4 GDP report.
However, we do not see this as a cause for concern. The weakness is almost certainly due to uncertainty caused by the fiscal cliff stand off in the final months of 2012. In fact, it shows just how much damage the US economy would have incurred had a last minute deal not been agreed. Clearly the uncertainty those difficult negotiations caused, hit the private and public sectors as decision makers scaled back their spending/investment decisions.
Now, though the fiscal cliff is no longer a threat and the debt ceiling debate that immediately took its place looks like being resolved soon as Congress looks set to agree a compromise.
With these two uncertainties removed, the economy will, in our opinion get back on its feet, and quickly. Indeed recent jobless claims data has been pointing to an improving labour market. Friday saw the release of the monthly non-farm payroll report. With an actual figure close to expectations it was notable that the will shook off the negativity of the Q4 GDP report and renewed the rally.
At this week’s FOMC meeting the Fed acknowledged the economic slowdown, but also commented that they thought it temporary and we agree. The slowdown is not the start of a new recession, but a hiccup caused by uncertainty generated by fear that the US economy could have gone over the fiscal cliff. That fear is gone, the S&P remains a buy.
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7th Feb - Is Cocoa’s Slide Slowing? 
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25th January - Vulnerable Sterling, sell a break of 1.5670