10th June - We still think the S&P is hot
14 June 2016
TECHNICALS:
WEEKLY S&P futures
continuation chart
On the 9th May when the market was
at 2046 having failed to breach the
top of the trading range for the fourth
time since May 2015 we pointed out
that a large continuation triangle (in
the iShares S&P ETF) was still intact
and while that remained the case the
bulls should stay long.
That was right.
Now the market has breached all the
horizontal Prior Highs and, although
it looks set to close beneath them on
the week, the bulls remain very
confident: the market does not want
to trade lower.
Daily Sep 2016 S&P chart
The markets’ dip at the end of the
week takes some shine off the
situation for the bulls, and a
determined push beneath 2089
would be very disappointing.
But on the whole the market still
looks in good fettle.
FUNDAMENTALS:
On 6th May we wrote about the outlook for the S&P in the aftermath of May’s non-farm payroll report. The number shocked the market coming in weak at just 160k against a consensus number of 200k, which had been the trend for many months.
We noted then that if the number proved more than just a one-off blip the Fed would have to defer any thoughts of hiking rates until much later in the year, or if it pressed on and hiked, it might be cutting them again before year end.
In the event, the Fed’s dovish tone did turn more hawkish and policy makers let it be known that a rate hike either in June or July was on the cards as they continued to judge the economy as fundamentally sound.
Traders initially responded with caution as the S&P traded essentially sideways, but broke to the upside after the release of a very strong New Home sales report seemed to validate the Fed’s renewed confidence in the underlying strength of the economy and the need to press on with small gradual rate hikes.
But what happened next took both traders and the Fed by surprise:
June’s non-farm payroll report released last Friday came in well below consensus at just 38k and with downward revisions to the two previous months reports of 59k, made the number look even worse. And although the unemployment rate fell, this was a result of people dropping out of the labour market not the result of some unexplained anomaly!
The Fed has quickly changed its tune. Fed Chair Janet Yellen declared in a speech on Monday in Philadelphia that policy is appropriate, meaning no rate hikes for the foreseeable future.
But how has the S&P responded to these new developments? The market has rallied.
Traders are reassured by the fact that the Fed sees the current economic situation for what it is; an economy growing at a very weak pace, remember Q1 GDP was just 0.8% annualised, with still benign inflation, with the back drop of a global economy that is also struggling, just look at the Euro zone, China and Japan.
But why would the S&P rally if the Fed feels unable to act due to a fragile economy? Quite simply, traders see an extended period of very low interest rates giving the economy a platform to heal from. Moreover, low interest rates mean extremely cheap funding which helps business expand and, just as important, fund trading positions.
In the last week the S&P has extended the rally and we judge it can go further. The Fed is constrained from hiking rates and this has stopped the recent Dollar rally in its tracks which will help US exports, indeed the most recent Trade data also released last Friday saw the trade deficit narrow from in excess of US$41.0B to US$37.4B.
This feeds directly into GDP since a bigger trade deficit is a drag on GDP.
In summary, we think the S&P will continue to rally. The global interest rate environment remains extremely accommodative and that supports stocks. And when interest rates do start to creep up once more it will be because the Fed will have seen several months of more positive data
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9th July - Is this the S&P's break-out moment? 
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3rd June - Dollar strength and Euro weakness