S&P rangebound

By David Morrison  |  29/01/2019 15:41

The S&P 500 has lost some of its upside momentum following a strong rally. Is it consolidating ahead of another push higher, or ready to reverse direction and sell off again?
 
The S&P 500 has rallied over 13% since Boxing Day, recouping over half the losses suffered during the October-December sell-off. As we can see from the chart, the index is managing to hold above 2,630 – a level which marks the 50% retracement of the sell-off and the triple bottom that formed in the fourth quarter of last year and which was finally breached in mid-December. We can also see that the S&P is finding intra-day support around the 50-day exponential moving average (EMA) just below this level, while bumping up against resistance at the 100-day EMA which currently comes in around 2,670. At some stage, and probably quite soon, the S&P is going to break out of this range. The only question is, which way? (Spoiler alert: I’ve no idea).

Consolidation

The index was very oversold towards the end of December and as we can see from the Relative Strength Index (RSI) that condition has been unwound. However, the S&P isn’t overbought at current levels suggesting that we could see more upside. This view is also supported by the consolidation we’re currently seeing (either a flag or a pennant depending on the clarity of your chart) which, according to the textbooks generally resolves itself by breaking in the direction of the previous trend – in other words, upwards. However, this isn’t fool-proof analysis and it’s worth noting the decline in volume that we’ve seen during the last rally suggesting a lack of conviction. So, technically it’s difficult to read much from this analysis.

Central banks

It’s much the same when one considers the macro background. Many analysts said the catalyst for last year’s sell-off was the foolhardiness of the US Federal Reserve in hiking interest rates while simultaneously running down its balance sheet. To counter this, over the last month we have had a stream of dovish rhetoric from the US Federal Reserve suggesting a pause in both rate hikes and a slowdown in balance sheet reduction is on the cards. In addition, last week ECB President Mario Draghi warned of downside risks to the Euro zone economy while the People’s Bank of China has hosed liquidity into its financial markets. All this is great news for the bulls. After all, if the world’s largest central banks are either pulling back from tightening monetary policy, or adding monetary stimulus, then it’s “risk on” once again. All those fears that Fed Chair Jerome Powell was determined to ‘normalise’ monetary policy even if it led to a decline in equity prices can be set aside.

Global slowdown?

But why have central bankers had this sudden conversion? It’s not just to prevent an equity meltdown (although that’s undoubtedly part of it) but also because they see problems brewing and are increasingly concerned over the global economic outlook. The data coming out of China, the US and the Euro zone has been weak and trending down. Only yesterday Caterpillar and Nvidia cited China’s slowdown as a reason for downbeat forward guidance. This followed on from Apple’s sales warning earlier this month in which it blamed China for falling iPhone demand. We’ll see the effects of this tonight when Apple releases its quarterly update after the bell. On top of this there’s the ongoing trade dispute between the US and China which has been complicated after the US charged employees of Chinese telecommunications giant Huawei with breaking sanctions against Iran and the theft of trade secrets from T-Mobile. The US has also just submitted a formal extradition request to Canada for Huawei’s CFO Meng Wanzhou, the daughter of the company’s founder, who was arrested in Vancouver on 1st December. Undoubtedly this will complicate US-China trade talks which begin this Wednesday in Washington. Meanwhile, the fourth quarter earnings season cranks up several gears in the coming fortnight. We also have a Fed meeting and press conference tomorrow with Non-Farm Payrolls on Friday. So, there are plenty of issues to worry about. But any positive news will lift sentiment sharply.
 
 
 
 
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