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US S&P 500 retests resistance

By David Morrison  |  10/07/2018 14:44

US stock indices, led by the tech-heavy NASDAQ, continue to find buyers as we head towards the second quarter earnings season

The major US stock indices soared on Monday, adding to gains made at the end of last week. The rally came after a better-than-expected June Non-Farm Payroll number together with slightly cooler-than-expected Average Hourly Earnings. The data has helped convince investors at the margin that the US economy is solid while fears of rising inflation are overblown. All this comes despite the US imposing tariffs on $34 billion-worth of Chinese exports with China promising a response in kind.

The banking sector was the main contributor to yesterday’s rally and this comes as the market prepares for the start of the second quarter earnings season. This Friday sees the release of numbers from Citigroup, JP Morgan, PNC Financial and Wells Fargo. The pace hots up next week with updates from a pile of big names including Netflix, Bank of America, Goldman Sachs, Johnson & Johnson, Morgan Stanley, American Express and Microsoft.

Investors will be looking for evidence that corporations are making good use of the tax cuts that came in at the start of the year, particularly as Trump’s fiscal stimulus is expected to add around $1.5 trillion to the National Debt. So far it appears that a large proportion of the breaks have gone on financing stock buybacks and dividends. This gives equites a short-term boost, but in the long term it means lost opportunities in terms of investment in new plant, machinery, upgrading IT and so on. This issue could become more of an issue as the Fed continues to raise interest rates and as it steps up the pace of balance sheet reduction.

As far as tariffs are concerned, there’s a feeling that Trump won’t push to the point of triggering an all-out global trade war and that the worst has already been priced in. This helps explain the bounce-back in the Dow and the S&P 500. Both indices contain some of the world’s largest corporations with extensive overseas exposure. These companies have most to lose in an escalation of the tariff tit-for-tat. By contrast fears of a global trade war were shrugged off weeks ago by the Russell 2000. This is because this is a broad-based index of 2,000 US mid-caps whose business is more domestically-focused than the Dow, S&P or NASDAQ. The Russell is today within a point of ending the session at a fresh record high.

Meanwhile, the tech-heavy NASDAQ 100 is closing in on its record intra-day high of 7,333 hit just over a fortnight ago. Once again, FAAAN (Facebook, Alphabet, Amazon, Apple and Netflix) stocks are back in demand. Meanwhile, Tesla fans take the opportunity to buy dips in the stock price, despite Elon Musk’s ongoing difficulties with production targets, quality issues and resignations from senior members of staff. The latest jump in the share price comes on news that Tesla is about to sign a memorandum of understanding with local authorities in Shanghai to build a car plant with production capacity of 500,000 electric vehicles per annum.

Chart-wise, the S&P 500 is once again testing resistance just below 2,800. A break above here will have many traders looking for the index to rally on and take out the highs made earlier this year. But others will exercise caution, waiting to see how the index ends the week, wary of a false breakout.

Overall, many analysts anticipate that this will be another strong quarter. Of course, that means there’s scope for disappointment and a market pull-back. But if results do beat expectations, and forward guidance is broadly positive, then there’s a good chance that the Dow and S&P 500 have another shot at taking out their respective all-time highs hit back in January.


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