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19th January - Can the S&P rally extend further?

22 January 2018




In early December 2017 we wrote:

Without a fresh continuation pattern to add impetus to the trend, it is vulnerable to retracement at the very least, if only to test the diagonal trendline support from 2008 which is far beneath the market because of the acceleration of the trend.’

And that remains true. The rally has extended since then and now is pushing into a band of coincident Fibonacci resistances starting at 2800.

And so we think the likelihood of a retracement has grown still higher.


A short-term retracement as -far as the band at 2667-2697.90 would be welcomed by the bulls; only a break of that band would suggest a more prolonged sell-off.


The long Bull run in the S&P shows no sign of abating as the market makes a succession of new highs. What then is driving it and what are the risks that could halt the rally?

From the Bulls perspective the market looks supported by increasingly strong fundamentals:

1.The labour market continues to create a steady stream of new jobs, meaning there is work for those that want it,
2.Growth stands at around or just above 3.0% annualised,
3.Inflation on several measures is benign, and especially so on the Fed’s Core PCE measure, and
4.The Fed’s approach to normalising monetary policy remains somewhat dovish.

Add in President Trump’s much vaunted tax cuts and traders see an equity market ripe for yet more all time highs.

What then are the risks that could blow the rally off course and cause traders to rethink?

We judge the Fed to be a significant risk. Currently policy makers are bemused by the lack of inflationary pressure in the economy, especially given the tightness of the labour market, and although they judge its absence is likely due to transitory factors, they are never the less taking a steady and gradual approach to both normalising interest rates and reducing their balance sheet, bloated by their QE bond buying policy.

But what is even more interesting to us, is the Fed’s apparent ambivalence to the impact Trump’s tax cuts will have on the economy.

While traders/investors clearly see a positive impact, the Fed has said both in its last FOMC policy statement from their December meeting and in the minutes from that meeting that they see little impact on the economy from the tax cuts.

We find that assessment curious, since it is estimated to add something in the region of US$1Trillion to the budget deficit.

Surely this should concern the Fed when there is also likely to be an inflation implication!

The argument put forward by Trump is the tax cuts will fuel growth, ultimately that may well be the case, but that will be a delayed reaction that might ultimately outway the deficit increase, but the near term effect will be a hit to the deficit.

Until and unless the Fed changes its mind about the impact of the tax cuts and other spending increases proposed to both infrastructure and the military, traders/investors are likely to hold sway and take this market higher.

Why then is the Fed so relaxed?

The Fed is set to get a new Chairman soon, Yellen as the out going Chairman perhaps wants to allow the new incumbent to make up their own mind. We shall see.

But for now this market is strongly bullish and we see it making significant new highs

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26th January - Watch Cable

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4th December - Can the S&P rally extend?

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