Analysis Of The S&P 500: Where Is It Headed?

Includes: SPXU, SPY
by: Vinayak Maheswaran

(Click to enlarge)

Source: YCharts

The S&P 500 hit a 6-year high when it touched 1531 last week. The index has been on a roller coaster ride over the last week and we can expect much of the same this week with all the earnings report releases coming out of the US retail sector. This week has already had corporate earnings releases from Lowe's (LOW) on Monday and Macy's (NYSE:M) and Saks (NYSE:SKS) today. Still to come, we have earnings report announcements from the Dollar Tree (NASDAQ:DLTR) and Target (NYSE:TGT) on Wednesday and a big day on Thursday with releases from Kohl's (NYSE:KSS), The Gap (NYSE:GPS), J.C. Penney (NYSE:JCP), Sears (NASDAQ:SHLD) and Best Buy (NYSE:BBY).

This week is going to see a lot of volatility due to this and it might make sense to open a long option on the SPXU as volatility has a positive effect on the long SPXU call strategy.

Technical Analysis

(Click to enlarge)

Source: YCharts

Investors like myself who still believe in the U.S. markets will take heart from the fact that the S&P has soared for 8 consecutive Fridays including the last one. If you've been following the markets for some time, you know what a bullish sentiment this is especially in the near term. Friday gains reflect that investors are of the opinion that prices will rise in the next trading week.

Fundamentally Speaking

Bearish correction - a near term thing

The index has gained 6.2% in 2013 alone after around 75% of the firms in the S&P 500 have beaten analyst expectations. There is even more good news for those long SPXU and SPY as the index is trading at 15 times earnings; this is below the 60-year average value of 16.4. There have been some big rallies in the S&P already this year and so the downside correction could persist. The good thing is that this weekly decline which is the first this year should not last long. There has been too much positive macro data coming out of the U.S. - PPI values were positive along with Non Farm Payroll figures (increased by 157,000).

Major Global indices volatile

The Italian elections are over and there is still some uncertainty in the Euro zone. Heading into the current week there were some major gains in Europe and Asia; in particular Japan. This week has seen some big declines with the FTSE 100 losing 85 points, the DAX shedding 176 points and even the Nikkei tanking 264 points. It's been a rough week across global markets as the fall in the Nikkei came as a surprise after the suggestion of Haruhiko Kunda as the next BOJ governor by the Japanese government. This was actually a move very much in line with the government's plans to let the Nikkei soar as the devaluation of the yen continues.

Fed Chairman Ben Bernanke testified in Washington DC today

Ben Bernanke testified before the Senate Banking Committee in a highly anticipated event among traders. Newbie traders will learn that public statements by Bernanke will increase volatility tenfold and this was especially so this time as the questions to the Fed chairman were not known beforehand.

The key take away from this event that I followed closely on Bloomberg and Reuters was that Bernanke plans to continue the bond buying program that has seen the Fed purchase $85B in bonds every month. His comments have indeed squashed rumors that the Fed might seek to slow down its stimulus. Stimulus programs tend to drive stock markets higher much to the chagrin of bears and this further supports my view that the S&P will rise and be at a higher value a month from now.

Event to Watch for on Wednesday: US Core Durable Goods Orders

It is the possible curtailment in automatic spending cuts that is due to take place on Friday, March 1 that is making the headlines. Nonetheless, speculators should not look past the Durable Goods Orders numbers that are to be released an hour before trading starts on the NYSE tomorrow. The forecast appears to be bearish with a value of 0.3% that is a decline from the previous figure of 1.0%.

Durable Goods figures are important because a rise in orders signify a healthy economy. Since durable goods are defined as those that have a shelf life of over 3 years, it shows economic stability when the orders go up as individuals and families are now shifting to these items over their primary needs. Additionally, it must be noted here that the Core figure does not include transportation goods.

Conclusion: Monthly call option on SPXU and SPY will pay dividends

The S&P 500 is below 1500 after declining almost 3.5% until it found a support level. The subsequent bounce was able to get back a majority of the intraweek losses.

I am bullish on the index and fully expect it to retest the record highs. The FOMC (Federal Open Market Committee) minutes were responsible for U.S. equities being hit last Wednesday. Bears would have been disappointed to note from the minutes that it seems very likely that QE should continue for some time to come. At the same time, bulls got a lot of encouraging signs with phrases like "unemployment falling", "housing rebounding" and "economy recovering" being thrown around. Friday's spending sequester is nothing more than a blip on the bullish horizon of the S&P 500.

Disclosure: I am long SPXU, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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