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The Reasons Why It Is More Probable That The S&P 500 Advances Than It Declines

|About: SPDR S&P 500 Trust ETF (SPY), QQQ, IEF, TLT, SHY, SHYG, SPHB, SPLV, VXX, VXXB, ZIV, SVXY, TIP, XLV, XLI, XLK, XLP, XLB, XLY, XLF, XLE, XLU, XPO, XLC, Includes: AAPL, AMZN, BDRY, GLD, GLDW, GOOG, GOOGL, HYG, HYT, IYT, LQD, MSFT, SEA, XTN
Summary

Among professional investors fear is subdued.

The economy is still healthy.

Development of interest rates is supporting.

USA-China trade deal and BREXIT play no role at the moment.

The economic indicators below are a look in the driving mirror - but see where we come from: After the consolidation in 2015 all the shown indicators accelerated again and at the moment no new consolidation is visible yet. Before the last two recessions (grey area) the lines had become flatter.

(YCharts)

The following graph is nearer to the "Now". You see weekly container shipping rates for smaller vessels (violet line) and for big vessels (orange). The long term trend is pointing down and rates are depressed because in the last boom the shipping industry built up too much capacity. That the market is still over-supplied we see in the depressed blue line (if actual demand was higher than supply than prices for all sizes would be high or at least rising). However, the interesting point is that the rates for the big vessels not only are rising since late 2016 but that they make a new high in the interim development. Cyclically they always tend to rise through March/April, but you have to keep in mind that 2017 was the year of synchronized global economic growth. However as you can see, rates are higher right now. I think that puts the actual economic situation better into perspective than, for example, some inverted yield curve.

(Source: YCharts)

The FED probably will not raise interest rates in 2019. This caused further advancing interest rate futures, so far.

(Source: IQFeed; Multicharts)

Some market participants even already expect lower yields in the course of the year. Thus the development, that we see in the 10-year future contract above, at the moment, could merely be the first leg of a measured move. The second leg could easily go to 126. After that, we run too much into resistance and probably need another catalyst to break through.

In financial models the use of lower interest rates for discounting future earnings lead to higher present values, which in turn help to keep stock prices higher than it would be in a scenario with higher interest rates. Additionally, lower interest rates support the extension of the current smoothly running economy.

The S&P 500 has had a nice comeback since the beginning of the year and gained 13 % because it was oversold caused by recession fears while the fundamental data, as shown above, still was and is strong. Now it seems like we are forming a little bit of a range. I think the reason is that the FED also forecasted lower growth for 2019.

(Source: IQFeed; Multicharts)

What we now have to see, is, that the bulls bid the market up quickly, so that other, hesitant investors again join the party. Supporting are two additional things:

First, in the middle of the chart above you see the VIX. It is declining. That speaks for no fear of a further extended drop down. Second, you see below, that the open interest of put options on the SPX is higher than the open interest of the call options. That means a lot of investors are of the opinion “we could relax and buy because we have insurance regarding the downside risk.

(Source: IQFeed; Multicharts)

In my opinion, neither some inverted yield curve nor BREXIT nor the USA-China trade deal will have an impact on the stock market for the upcoming days, weeks or even month.

Regarding the yield curve inversion: The problem is that there are many rates from which one has to choose, to build the spread. Some show an inversion, others not. Some show it sooner, others later. And even if an inverted yield curve forecasted correctly a nearing recession, there would be many months left for rising stock markets.

BREXIT and USA-China trade deal are old shoes. Look it up, last year when the USA-China trade war was a relatively fresh topic even the S&P was advancing all over the summer till into the autumn. Sure, it is in the media and it is important in general. But these topics are already priced in.

Above-mentioned points tell me, we should not fear a recession yet. And especially if the S&P moves on quickly, we have a high probability that stock market advance in the next few weeks or even month.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.