The S&P 500, our key risk asset barometer, is likely to be moved by 2 sets of forces:
1. Its tendency for an oversold bounce pushing it to the 1114-1140 range
2. Friday's US jobs reports and their leading indicators out Wednesday and Thursday
As the below chart shows, the S&P 500 has shown fairly consistent behavior over the past year.
S&P 500 DAILY AVAFX CHART 01 Feb 03Technical Indicators Say More Upside to 1114—1140 In Coming Days
Typically when the S&P 500 begins to rise above its lower Bollinger Band as it did Monday, it tends to rise to at least mid-way to its upper Bollinger Band or reach it, suggesting that the current move could go to 1114-1140. Implication: risk assets likely to move up in the coming days, as the S&P 500 remains our barometer for risk appetite.
Why? With the 50 day Simple Moving Average sitting at that midway point around 1114, that provides real resistance. If the S&P 500 surmounts that, then we're looking for the bounce to 1114 -- 1140, assuming this weeks' jobs data does not move markets.Fundamentals Say More Downside Longer Term
We still believe there is more downside risk over the longer term, even though the long term uptrend for the S&P 500 and thus risk assets remains intact. Why?
· The forces behind the current downtrend remain intact Euro zone debt worries
· China growth cooling concerns
· The overall theme of global data suggests lackluster growth at best in most major developed world economies
· Markets continue to ignore good news like the earnings estimate beat from shipper UPS or strong guidance from Whirlpool. Note that these are particularly significant reports because they both suggest firming of consumer spending, a key criteria for US and thus global recovery.
· Pending Home sales beats estimates, also no real reaction from market
· Up days continue to be on below average volume
· As Graham Summers pointed out in his recent article China on the Way Down: More Trouble Brewing for U.S. Stocks, the Shanghai Stock index has often served as a leading indicator for US stocks. Comparing the Shanghai (SSEC) index and the S&P 500, I note that Shanghai began its recent and ongoing downtrend December 7th 2009, whereas the S&P 500 only began its pullback January 20th.US Jobs Data Wednesday--Friday Could Change Everything
Of course, the above does not consider the potentially huge impact of the US jobs reports and related leading indicators today and tomorrow. Should these significantly beat or miss estimates, they could well sway markets in their direction, either fueling the current oversold bounce or killing it off. Note that markets have not been responsive to positive news of late, which suggests either little positive influence or a move down is the more likely result.
However, these reports are one of if not the major market moving reports of the month, and are capable of shifting market trends.
The vast majority of US GDP is consumer spending, and for that to attain sustainable growth, employment must improve. A very positive or negative surprise could fuel or douse the current oversold bounce. Note that calling how markets will react is not straightforward.
While a positive surprise would be good for longer term recovery, it also would suggest that interest rates will rise sooner, which is typically bad for stocks. However, given current rates, even an increase would still mean very low rates, so the overall effect of a positive surprise could still boost stocks. Much will depend on whether markets are inclined to look at the positive or negative perspective. Lately, markets have been negative.Never Forget the US Dollar
Keep in mind too that jobs are one of if not THE primary growth measure the Fed is watching in order to set the pace and extent of stimulus exit and rate increases, thus a positive surprise would almost certainly boost the US dollar vs. other currencies. Thus it could also hurt stocks to the extent that there are those who (wrongly) believe that a rising dollar generally drives stocks down. In fact it is usually rising stocks that drive the dollar down. For a full explanation (listen up, Briefing .com!) see: The Must-Know Relationship Between Stocks and the USD, Stocks Drive the U.S. Dollar: Part II
For a full listing of the key leading indicators to watch over the coming days see: Friday US Jobs Reports: Explanation, Impact, How To Profit
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