24th April - The irrepressible S&P ?
28 April 2014
TECHNICALS:
Monthly chart
The S&P’s spectacular break up through the Highs from 2002 and 2007 is hugely compelling for the bulls.
Daily June 2014 chart
But the sideways price action since the beginning of March this year is an important focus.
We note with interest the failure to sustain a break down through the support from Prior Highs from the beginning of this year earlier this month… the bounce was impressive.
But with the market at the top of a trading range, bulls will want to wait for a clear break above 1877 to fine-tune their timing before adding to longs.
FUNDAMENTALS:
The Ukraine crisis has developed into an old fashion cold war stand off between the west and a Russia that still sees herself some how separate from the rule of law that governs international relations between the rest of the developed civilised world.
Fearing a western plot to encircle her with an ever-expanding N.A.T.O alliance, Russia has fermented unrest in the former Soviet Republic of Ukraine, to provide a flimsy excuse to invade, arguing that the mainly ethnic Russian population of the eastern part of Ukraine was some how in danger.
The model has already been tried and tested in Crimea and although the west imposed sanctions, they were so weak that Russia laughed them off.
The impact of this crisis on markets, especially stocks, has been sporadic. Initially stocks took fright, but after Russia incorporated Crimea and events seemed to calm, stocks bounced back. Then as the unrest in the East of the Ukraine increased, with agitators calling on Russia to absorb the east into the Russian federation, the S&P sold off once more.
However, these periods of weakness are not long-lived. The risk of a military confrontation between N.A.T.O and Russia are not just remote, but non-existent. The likes of Poland and the Baltic Republics may be feeling vulnerable, but they are part of the western alliance and Russia knows that any invasion there would meet a entirely different response.
Traders understand this and are quick to refocus back onto economic fundamentals.
This week US corporate profit reporting has begun and results have been largely positive driving the S&P higher, and as the US economy continues to thaw after the extreme winter weather, the outlook for the S&P remains bullish.
There is obviously a risk that if the crisis in the Ukraine deepens, Russia invades and the west actually responds with some stinging sanctions and that the S&P could experience anther bout of risk aversion; that has been the pattern over recent years in response to other geopolitical and financial crisis, but in the final analysis the market bounces back as traders react to Macro economic news.
Looking ahead we judge the US economic recovery remains on track and with the Euro zone economic recovery slowly improving, the S&P remains a buy.
During the cold war years when the threat of conflict between the Soviet Union and the west was real with nuclear Armageddon always lurking in the background, traders learned to live with it and markets mainly focused on economics.
The current crisis is more of an echo of that earlier time rather than a return to it. Russia regards herself as a Great power and rather than seeing her future as a partner of the west sees herself as a counterbalance and therein lies the problem. But the Russian economy relies on revenues generated by energy sales to the global economy as much as Europe relies on Russian Gas. The difference is Europe can in time develop an alternative energy policy, Russia’s economy would struggle without those revenues. Russia has in the last 20 years become integrated in the global economy and if she oversteps the mark, the rest of the developed world could indeed inflict economic damage via sanctions.
In summary the risk of economic damage lies with Russia and not the west and equity markets understand this, hence the short term nature of recent sell offs.
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