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11th May 2018 - The S&P bulls are back

15 May 2018

TECHNICALS:

WEEKLY CHART

The completion of a large continuation triangle formed since late January 2018 is set to drive the market up a good deal higher. 

DAILY CHART

.DAILY CHART

The completion of a bull falling wedge was the catalyst for the approach to the edge of the triangle and the break coincides with a break above the Prior High of 2718 which should provide additional support in the classical structure of a bull trend.

The bulls are in charge and the minimum move is up as far as 3000.

 

FUNDAMENTALS:

The S&P has endured a prolonged period of correction and consolidation despite an economy that has continued to perform reasonably well. While growth has remained moderate and inflation reasonably benign, the Fed has recently begun taking small calibrated steps to withdraw the exceptionally easy monetary policy put in place during the financial crisis.

However, the S&P began its current consolidation in the dying days of Yellen’s tenure as head of the Federal Reserve. Janet Yellen’s policy stance was well understood. But the stance of the incoming Chairman of the Fed was less well-known and traders fretted his stance would prove more hawkish.

In the event his tone differed little from Yellen’s and although the three expected rate hikes this year may now turn out to be four, traders accept that with the economy running happily at around 3.0% with almost full employment and Core PCE at or close to the Fed’s 2.0% target, rate policy needs adjusting higher.

What unnerved traders was Trump’s decision to begin imposing trade tariffs. Steel and aluminium came first with the threat of tariffs being imposed on imported cars. The aim was to get China to more fairly open its markets. And although China retaliated, the move was small. Clearly these actions gave rise to fears of an impending trade war and the atmosphere wasn’t helped when Trump demanded China significantly reduce its trade surplus with the US.

In an attempt to avoid a trade war the US has sent a trade delegation to China. How successful this will prove remains to be seen.

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For now, traders have turned their attention to domestic issues. As already noted the US economy is growing at around 3% and that is before Trump’s tax cuts fully work their way through the economy. Additionally Trump intends spending heavily on infrastructure regeneration and military expansion. Again these have yet to impact the economy.

Another consideration is Trump’s decision to pull the US out of the deal with Iran. Negotiated by Obama it was meant to prevent Iran from developing a nuclear weapon. The result to date is higher oil prices. The US has vast reserves of shale oil and gas which will become more economic as oi prices rise.

The US has already been projected to become the world’s largest energy producer. Higher oil prices will have an impact on the trade balance as the US moves further away from a net energy importer to a net exporter.

Then there is the potential impact of monetary policy on the stock market. The Fed has begun the process of tightening by both increasing interest rates and reducing its QE bond holdings. But the new normal for interest rates is expected to be significantly below historic levels of normality, meaning in real terms money will remain cheap, a factor that will further support business and equity markets.

In summary, we judge the S&P’s recent period of price action has been a correction fuelled by a Change of Chairman at the Fed, coupled with a US President that, unlike many of his predecessors, is willing to not just talk tough, but act tough too. Whether his actions on trade achieves the desired affect remains to be seen, but this President means what he says when he says “America First”!

The S&P looks poised to embark on a fresh leg of the bull market.

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27th April 2018 Bonds look bearish across the board

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