9th May - The still poised S&P
09 May 2016
TECHNICALS:
WEEKLY S&P futures continuation chart
On the 18th March 2016 we noted that the S&P was 2/3 of the way up the long-term trading range.
Since then we have seen the market test the top of the range and fail there.
Daily iShares S&P chart
But the large completed bull triangle in the iShares S&P ETF remains intact.
The market has simply drifted back to :
The close above 1435 was indeed an important break, so the drift back is certainly short-term disappointing; but unless 1385 breaks, the bulls shouldn’t lose hope yet.
FUNDAMENTALS:
Since February this year the S&P has been trending higher despite weaker data that culminated in the release of a very weak Q1 GDP report, as traders focused on and took comfort from, a newly-dovish Fed.
After hiking rates in December and all but declaring their intent to deliver four further rate rises in 2016, data turned weaker, weaker than the already just moderate expansion that policy makers seemed content to justify as reason to begin taking monetary policy back up to a more neutral level.
However, the Fed’s dovish tone continues, despite subtle changes to the policy statement released after the previous week’s FOMC meeting, that omitted reference to global risks and their potential to damage the US economy, the S&P has retraced. Why? And what comes next?
Although the Fed has retained a cautious stance, their bias is still to hike interest rates. The intention to hike four times has been watered down, to just two hikes. But, as ever, that depends on economic data. Although GDP has flagged weakness the Fed has cited the solid creation of new jobs as reported by the monthly non-farm payroll report. But Friday’s release at 160k has significantly missed consensus and when viewed together with the weakening trend in non-farm productivity data and rising trend in unit Labour costs, one could conclude the Fed might have been clutching at straws!
The productivity data and unit labour costs suggests employers might have retained labour and continued to take on new labour, in the belief the economy was going through a soft patch as in previous years and would recover; but does today’s payroll report suggest employers are re-assessing the economic outlook?
If Friday ’s weak non-farm payroll report proves more than just a one-off blip and employers are scaling back on hiring, the Fed will find it increasingly difficult to maintain its tightening bias. Moreover with policy at current levels, if a fresh slowdown does manifest policy makers will need to resort once more to other policy levers.
Consider then, the impact on the S&P. Traders/investors have until recently taken the index higher in the belief the economy was in fundamentally sound shape, but not robust enough for the Fed to fulfil its original tightening plans, meaning the outlook seemed to be a steadily strengthening recovery, with still very accommodative monetary policy, but what if recent data suggests that assumption no longer holds true?
Will traders continue to buy stocks just because the Fed cannot hike, or will economic fundamentals re-assert and traders liquidate longs on fears of a fresh slowdown?
The one bright spot this week was the better-than-expected ISM non-manufacturing survey, but that good news was tempered earlier in the week by a weaker ISM Manufacturing survey.
The truth is the outlook for the US economy remains unclear and will probably remain that way for a couple more months yet. Were the Fed to brush aside the run of weaker data and hold to its own belief that the economy will snap back and hike anyway in June, we think they would be easing again before year end.
In summary, until a little clarity emerges we doubt traders will be quite so willing to buy stocks simply because the Fed has adopted a mildly dovish tone, we now judge traders want to see data begin to show a solid bounce back in data, that means the S&P looks set to correct further before the ever optimistic Bulls see value and are tempted back.
Next story:
13th May - Time to buy Short Sterling 
Previous story:
18th March - The poised S&P