Stocks Close Lower On Stimulus Concerns
Stock markets closed lower on the week, for the first time in a month as investors consider the possibility stimulus programs around the world will either be coming to an end or ultimately prove inefficient relative to the true needs of the economy. For the most part, economic data has been supportive and corporate earnings have beaten analyst estimates more than they have disappointed. Unfortunately for bullish investors, positive data also has negative connotations in the current environment because it ultimately suggests that central banks like the US Federal Reserve can start cutting back on stimulus programs.
When downside moves like this occur (after encouraging data points), it suggests that investor sentiment is still weak and that there is a general lack of conviction that the economy can sustain itself without dovish support on the monetary policy side. But at the same time, we have seen some earnings misses, with primary examples seen in the tech sector (Microsoft, AMD, Intel, and Google). In the Industrials, Caterpillar saw large losses (more than 4%) after its own earnings miss, so the complete picture is not positive. Because of this, it is more than likely that stock markets will have trouble gaining traction in the next few weeks. Spread betting traders should keep this in mind when looking to trade the major benchmark stock indices (S&P 500, FTSE 100, and DAX), as it is more than likely that any attempts at a rally will meet selling pressure for the remainder of the summer.
The S&P 500 is starting to flatten out at the currently seen elevated level, with momentum slowing and further upside from here starting to look limited. To confirm this bearish bias, we will need to see a break of key support levels at 1665, so at this stage it makes sense to look for breakout strategies when establishing new positions. A clear downside break of 1665 could see some stalling in the 1650 region but if we trade below 1650, there is no additional support until the 1590 area. Sell a bear break of 1665, with stops above the all time highs but move stops to break even once 1650 trades.
The long term picture in the FTSE 100 is bullish, given the clear break of Fib resistance at 6530. This places the longer term target much higher at 6865 but shorter term prices could see some downside activity if support levels at 6480 fails to contain prices. Bullish traders can look to buy into 6480 but keep stops relatively tight given the weakening momentum seen to the upside.
The DAX is starting to look like the weakest index amongst the majors. This bearish bias started with the downside break of 8280, and a downtrend channel is now seen developing on the hourly time frames. More downside is expected as long as prices remain below 8360.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.