13th December - We still love the S&P
16 December 2013
TECHNICALS:
WEEKLY S&P
Is that a key reversal? Not quite – but nearly. But the market is a long way from critical support down at the 1700 area.
DAILY Cable CHART
The immediate support of note is the horizontal from the Highs at 1762.
The triple top would be confirmed if that broke – but until then .... We are bulls short, medium and long.
FUNDAMENTALS:
The S&P and other leading equity markets have largely ridden a bull wave for most of this year on two factors:
The recovery in the US has proved to be durable if undramatic. Unlike most post WW11 recoveries this one has come with slower growth, a labour market that has taken longer to re-adjust with tepid job creation and a housing market that has only really come back to life this year.
The Fed therefore, saw the need to continue with its virtual zero rate policy and massive QE/Asset buying program to help foster a self sustaining recovery. But despite their best efforts, the recovery still remains at what can best be described as a moderate pace.
However, policy makers are nonetheless concerned that their easy money policy cannot go on for ever. Some on the FOMC committee are thinking that if the Fed doesn’t begin reducing its stimulus soon, by the time the recovery does become self sustaining, it will not be possible to reduce and ultimately return policy to neutral without inflation becoming a problem.
So committee has been split about how soon the recovery will become self-supporting. And split too about just when the Fed should begin to reduce the stimulus, popularly known as tapering.
This lack of agreement among policy makers has produced an unwanted lack of clarity which has existed since May of this year. The effect more recently on equity markets is clear; they have begun to correct.
But in recent weeks data has firmed further, with two months of better than expected non-farm payroll and yesterday’s better than expected retail sales reports. The S&P is not rallying on the good news, the opposite has occurred. Traders have focussed on what the data means to the Fed and they assume the Fed will be more likely than not to taper sooner rather than later, perhaps at next week’s FOMC meeting.
Another factor that has had a bearing on this is the budget negotiations which suddenly took an unexpectedly positive turn this week with Congress apparently agreeing a budget deal.
The budget dramas that dogged the US economy during the Autumn were a contributory factor in keeping the Fed on hold, if that disagreement has been resolved, the Fed could feel more emboldened to act.
There is yet another variable to consider. The Chairmanship of the Fed is set to change in the coming months and the new incumbent; Janet Yellen, has spoken out strongly about the need for the Fed to maintain its support for the economy. In truth, even if the Fed starts to taper next month, the stimulus will still be growing since this would be a reduction of new stimulus not a removal.
We judge that the long period of indecision and uncertainty is what hobbles the S&P. In our view once the taper policy starts, traders will know where the Fed is heading and quickly get used to it and if data remains solid, the S&P should rally further, so the sooner the Fed returns clarity to the markets the better.
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