S&P 500 Breaks Through 200 Day Moving Average

Includes: BMO, CF, CM, OLN, PCL, RY, SPY
by: Chris Damas

The S&P 500 has approached its 200 day moving average for the fourth time in the past fourteen trading days, on May 27, June 3, and again Monday and yesterday. Today should see the S&P 500 break out to the upside.

The DJIA at 10,336, is putting in another good performance, up 145 points to exceed Monday’s high of 10,328.

But the S&P 500 200-day moving average is a moving target.

As the market has recovered, the 200 day keeps creeping higher as well. It was 1,105 a few days ago.

Currently (1:30 pm) we have:

  • S&P 500 index: 1,107.11
  • 200 Day MA: 1,108.26

My prediction is that today’s May US Industrial Production number will catapult the S&P through this level, consider by many technicians and traders to be a key ceiling, and then much higher.

The consensus for the May IP number is 1.0% (Bloomberg) with a range of 0.6% to 1.6%.

My bottom’s up research has shown me that industrial activity is alive and doing very well state-side.

We expect the May IP number to have a “2” handle with an uptick in capacity utilization to the 75% level.

We already have seen a good indication Canadian manufacturing is growing – April sales, admittedly a pre-euro crisis number, were up 0.2% and have been steadily up all year. Capacity utilization up here climbed to 74.2% in Q1 from 71.3%.

Lower labor costs, lower energy costs, and decent operating leverage combined with good US export pricing is going to lead an industry-led resurgence in the US economy that supersedes the weak consumer situation.

May US export prices announced yesterday, were up 0.7% and up 5.8% year over year. This is indicative that May industrial production growth announced today will be better than expected.

Everyone is waiting for the notorious month of May to be revealed in troubling economic data, from the USA, Europe and China.

Tack on the threat to Europe of a default in Greek sovereign debt, which we predicted as a strong possibility several months ago, and now people are openly discussing it as a foregone conclusion.

Admittedly, the US housing market is weak, and the May Building Permits number should be lousy, as was the National Association of Home Builder confidence Index, which was only 17, down from 22 in April.

But this is a dead-house (I mean horse), that has been beaten to death and is no longer relevant to the major DJIA companies that don’t sell houses and make more of their sales in Asia and Europe rather than the USA.

This leads to this conclusion:

The markets have discounted most worries and would require a major, unforeseen event to go lower.

I don’t see one (I’ve predicted the Greek default, euro collapse and so-on so cannot consider these “new”).

The way to play this market is through ETFs and Index futures. In particular, we have been buying the XFN (Canadian Financials Capped Index).

We think the Canadian bank stocks are a bargain and started buying them Monday.

The Canadian bank stocks have been beaten down due to fears of “Fin Reg” in the USA, and the possibility of a bank capital tax coming out of the Basel talks. We feel the former has been discounted by the banks. The latter turned out to be a non-starter and successfully defeated by the Conservative Federal Government, hosts to the G-20 and G-8 later this month.

Here’s our Canadian bank buy list:

  • Bank of Montreal (NYSE:BMO)
  • Royal Bank (NYSE:RY)
  • iShares S&P/TSX Capped Financial Index Fund (XFN)

US Buy List:

  • CF Industries (NYSE:CF)
  • Olin (NYSE:OLN)
  • Plum Creek Timber REIT (NYSE:PCL)
  • iShares S&P 500 Index Fund CAD-Hedged [XSP.TO]

Buys in the Canadian small-cap industrial sector include:

  • Canexus Income Fund [CUS.UN]
  • Cascades Inc. [CAS]
  • Noranda Income Fund [NIF.UN]

Post Script: The S&P 500 (SPX) closed at 1,115.25, well above its 200 Day MA.

Disclosure: Author is long all securities mentioned