18th March - The poised S&P
21 March 2016
TECHNICALS:
WEEKLY S&P futures continuation chart
The long-term S&P chart suggests that the market is two thirds of the way towards the top of a trading range.
Not a particularly interesting situation.
Weekly iShares S&P chart
But the market (for Sterling investors) is on the point of breakout of a large continuation Triangle.
Cautious investors will want to wait for a close above 1435 before buying, a move that will have taken out the two prior Highs…
The minimum move of a successful completion of the Triangle?
About 1650.
A 14% bull move
FUNDAMENTALS:
Just four weeks ago the S&P looked on the verge of a serious sell off. The economic news coming out of China was one of continued weakness, Japan published weaker than expected Q4 GDP of -1.4% annualised, the ECB was briefing on the need for a fresh stimulus and the US economy had recently published unexpectedly weak non-farm payroll which capped off a run of weak data.
But fast forward to the present and the market has not only rejected the lows, it looks set to test the recent highs. What has changed?
In China, nothing much has changed. And in Japan the economy still looks fragile. But last week the ECB delivered a much bolder easing package than expected: cutting rates, increasing significantly the monthly bond purchases in its QE program and expanding the range of purchases to include corporate bonds.
After an initial set back, as traders were at first surprised by the accompanying statement that there would be no more rate cuts, markets rallied.
Attention then turned to the Fed. The FOMC policy meeting was looming large and traders were anxious about the Fed’s take on the US economy. Would policy makers deliver a statement that sounded a note of caution or would they try and talk the economy up and give the impression that they were still on track with their time table for rate hikes?
In the event they were very cautious, noting global risks and the potential to derail the US economy.
Moreover, their policy guidance was significantly trimmed. When the Fed hiked in December last year, they gave a clear impression that policy would be tightened four times during 2016. There were the usual caveats that any moves were data-dependant and gradual.
At yesterday’s FOMC meeting the tone was more circumspect. The Fed now sees no more than two rate hikes this year and it wants to monitor the economy to insure global weakness doesn’t slow current “moderate” US growth and that the economy continues to create jobs at a solid rate.
The wording of the policy statement was indeed more dovish that expected and the S&P rallied, while the Dollar weakened. So although the data coming out of the US hasn’t suddenly strengthened, equity traders/investors are relieved the Fed isn’t in a hurry to hike and in fact if activity in the US remains around current levels they may not hike at all this year!
What does this mean for the S&P?
It is mildly bullish. Traders will feel encouraged by an inactive Fed combined with other Central Banks that are, in the case of the Bank of England, still open to ease and in the middle of a substantial QE program in the case of the ECB. That encouragement is enough to take the market higher.
We can see the case for retesting the highs in the current Central Bank environment, but do we expect to see new all time highs? That might need something more substantial than Central Bank support, perhaps a stronger economy would do the trick.
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9th May - The still poised S&P 
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4th March - the persistence of Gold