Seven Days Ahead offer financial and commodity market forecasting, technical trading analysis, forex forecasting service, stock market trading recommendations, guides and strategies in the UK.Sign up now

19th March - The next bull leg of the S&P

23 March 2015

TECHNICALS:

Monthly S&P chart

The celebrated break of the S&P through prior Highs around 1580 established in 2000 and 2007 has been comforting the bulls for a while.

Technicians may have been wondering though whether the bull market was running out of steam.

The cluster of Fibonacci projections around 2000 for example was a possible powerful resistance.

Those fears were compounded very recently, by the fall back beneath Prior Highs that is  so clear in the day chart.

Daily S&P chart

But yesterday’s price action will have revitalized the bulls.

The bounce back above the Prior Highs of last December  - if sustained -  will have re-established the integrity of the bull trend.

If that is so then maybe the market will no stop at the 2000 level and move on to the next Fibonacci cluster on the monthly chart  - around the 3000 mark.

A massive new bull leg may be beginning.

FUNDAMENTALS:

The March performance of the S&P and some other leading equity markets (excepting the German DAX, had been weak until yesterday (18th March). Now the S&P may have rediscovered its bullishness.

Part of the reason for reason for the ebullient price action is changing market perception of the Fed’s intentions over interest rates and when it will start raising them.

The market’s reactions have been something of a paradox of late.

In response to the stronger-than-expected Non-farm Payroll earlier in March, equities ultimately sold off. The reason was that a strong labour market meant the Fed was more likely to raise interest rates sooner rather than later.

But the following week, retail sales came in much weaker than expected (weather related) and jobless claims became more volatile, meaning the Fed might decide to wait a little longer to see how the period of economic weakness played out. Hence the recent recovery in the S&P.

In the event, yesterday’s FOMC policy statement had something for both foreign exchange dealers and equity traders. Our interest is in equities.

In a nutshell the Fed dropped the word ‘patience’ from its policy guidance. That means they could hike at any meeting from here on, if economic activity is deemed strong enough. But at the same time they lowered their growth forecast. Which meant that rate rises, when they do start, might not need to be as many as previously anticipated.

So although the Fed has cleared the decks and made ready for policy action, they simultaneously soothed market fears with the downward growth forecast revision.

In reality, the turn of the policy cycle is always a cause for angst. When a prolonged period of easy money comes to a close traders get jittery and this period has been much longer than most with policy at its easiest in living memory.

But reflect: the Fed is close to raising interest rates because the economic recovery has moved to a level where it is self-sustaining, winter weather not withstanding. The labour market has strengthened with a falling unemployment rate, and although inflation remains at low levels, it would be foolish not to begin a gradual adjustment of policy back to a more normal level. The alternative would be to wait for inflation to rise, especially dangerous given the bloated balance sheet of the Fed caused by three rounds of QE which will take a long time to work off.

But what now can be considered a normal level of policy now?

Clearly before the financial crisis/recession, that used to be around 4 – 5%, now though it is likely to be much lower; probably around 2 – 21/2%.

If that is where policy ends up and the moves to get it there are small, equity markets should not be upset.

In fact, the opposite is true. Small moves now will ensure inflation remains tame and the combination of low oil prices and still low interest rate policy, by historic comparison, should mean the economic recover strengthens and equity markets, including the S&P rally much further.

Receive three Market Updates fully-illustrated with charts each week for one month FREE

Next story:
27th March - The solidity of the Dax

Previous story:
6th March - How high for Oil?

< Back to menu

Financial Market Forecasting | Bonds Technical Trading Analysis | Commodity Specialist Guide | Daily Indices Guide | Technical Trading Guide UK |
Site Map | SEO Services | We're listed in the UK Business Directory