26th September - The S&P remains strong
30 September 2013
Use pull backs to add to longs
TECHNICALS:
WEEKLY CHART
When the market has been drifting for a while nerves can set in. It is good to remind ourselves just how bullish and underpinned the market is. The Highs from 2000 and 2007 are formidable support and look set to drive the market a lot higher above the lost decade at the beginning of the century. Only if the band of support 1574-86 were broken would the bears be really on to something
DAILY CHART
The detail of the drift shows the cause of the disappointment : the breakdown through the support from the prior High at 1699.
But note the tiny volumes and anyway the presence, not of a single critical support, but of a band of support.
Note too the rising support from the diagonal.
They converge around 1665. Only a break of that level, would be the occasion of real (and even then only short-term) disappointment. Otherwise, we remain bulls and keen to add on pull-backs.
FUNDAMENTALS:
The Bull trend in the S&P began back in November 2012. Despite several pull backs, the market has consistently made new highs. The first significant pull back occurred in May this year in response to the Fed surprising markets with it’s tapering remarks.
Since then traders have spent much energy speculating on when and by how much the Fed will begin to taper. But as data remained solid, traders recovered their risk appetite and the market moved ahead. Then it experienced its second significant correction during August after the Syrian government unleashed its chemical weapons on its own civilians, prompting the US to threaten a missile strike as punishment.
We know that was averted as a result of the US and Russia reaching agreement on how to deal with Syria’s chemical weapons arsenal. It was a plan that the Assad regime quickly agreed to. However, the resultant rally has yet again stalled.
We think it is yet another correction and the Fed is once more the culprit.
Ahead of last week’s FOMC meeting expectations were running high that the Fed was poised to begin tapering with a token amount, probably no more than US$5 Bn. Traders had priced that into the market and reasoned that as the economic recovery broadened, the Fed needed to at least start to scale back its sizeable policy stimulus and in a way that didn’t act as a shock to markets.
But the Fed delivered a surprise. Not only did they not taper, but they revised their own economic growth forecast lower as a justification for not acting.
The initial relief rally in stocks soon faded, as traders realised the Fed’s abstention was only likely to be temporary, unless the recovery stalled. And, despite several Fed speakers attempting to re-assure markets, traders and investors that the economy isn’t yet ready for taper, traders are now already speculating on when the Fed will judge it is.
Having only just revised their growth forecast lower, the Fed is unlikely to change its stance for at least a couple FOMC meetings, unless data suddenly turns much stronger.
That leaves equity traders in a state of limbo; they know the Fed won’t act in the short term, and is likely to act in the medium term. But when does the short term end and medium term begin?
The Fed has left a clarity void. The next move in policy is obviously the start of the tightening cycle and although taper is a reduction of new stimulus and not the removal of existing stimulus, it is still the start of a long policy tightening. Equity traders understand this but what they don’t like is the interminable period of uncertainty that began in May and seems currently to have no end.
Add in the looming mid-October deadline for extending the US Government’s debt ceiling and threatened government shut-down if Congress and the Administration fail to find common ground and the S&P could correct further.
But that is all it is: a correction. We judge the recovery will continue and the Fed will eventually begin to taper. Once that uncertainty is removed this market will make new highs, but not just yet.
Patience right now is the key. But with most recent geopolitical tensions easing, and even Iran adopting a more conciliatory tone, this market needs clarity from the Fed to resume the bull trend. And it will come.
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03rd Oct - Soybeans Slip to Key Long Term Supports 
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26th Sep - Brent Crude Pulls Back to 38.2% Support