Mark Sturdy & John Lewis submit: The S&P still looks good, but...
The Dow is getting all the headlines, first for getting up through the all-time highs of 14th January 200 at 11750 and then again yesterday for breaking the12,000 level. But there are good reasons for preferring the S&P 500 index as a more broadly-based indicator. And that market hasn’t done quite as well - it’s still 12% beneath the all-time highs. Nonetheless we have been bullish of it...
We first went long of the S&P in our Market Update of 14th September at 1327.30. The market is now trading 1372 having been up to 1380. That is a 4% move in the last month. We think there is more to come but some profit-taking looks prudent here.
There is no Top Formation in place, nor have critical supports been broken. So the 4% move of the last month is not the end of the bull market, but there may well be a pause at these levels as the impetus from the Head and Shoulders pattern diminishes because the minimum target has been reached. This is a short-term consideration; we retain a core long-term position because the medium and longer-term structures are still clearly in place.
TheMacro Trader’s view: We went long of the S&P on September 14th as we judged it looked ready to break through the recent high, buoyed by the prospect of the Fed remaining on hold at their September 20th FOMC meeting. As we are all aware, they held policy steady at that meeting and the market did indeed rally further.
Although it looks set to make new highs, we are concerned there may be a period of consolidation as traders ponder the Fed’s next move. Additionally, the other major stock markets, while bullish are a great deal more hesitant than the S&P.
With the market now focusing on next week’s FOMC meeting, there is a little more uncertainty about the decision than there was last time. So we suggest trimming bull positions at these levels.
But remember, whatever they do, we believe the market will rally in the medium and longterm:
- One more hike, representing an insurance policy against inflation, will be taken by traders as a sign the economy remains strong enough to handle it.
- A continuation of the pause, our forecast, will support expectations of easier policy next year as the Fed acts to support the economy amid what we read as a growth pause.
Either way the market looks set to move higher, once the current uncertainty centered on the Fed is resolved.
Mark Sturdy & John Lewis are editors of Seven Days Ahead.