Cloudy Stimulus Outlook Brings Down Stock Values
Stock markets closed lower once again for the week, with the second negative weekly close in a row for equities markets. The S&P 500 is now showing some steady corrections after managing to hit another new all-time high as traders start to price in the possibility that the US Federal Reserve will start to signal an end to its historic stimulus program (the third round of quantitative easing). Volatility slowed into the early part of the week, as the Memorial Day holiday in the US dried up some of the available liquidity, and kept trading within tight ranges in the first few daily sessions. This activity reversed into the weekly close, with prices in the S&P 500 reaching new lows.
Most of the negative sentiment is being propelled by the increasing likelihood that we will start to see monetary stimulus removed from the financial markets, and this will put pressure on companies looking to pass analyst estimates in their earnings reports. The over riding expectation is that the Fed will directly signal that stimulus is no longer necessary once the US unemployment rate drops to 6.5%. We have seen steady improvements in the labor market, so a growing majority of traders are positioning themselves for lower prices in stocks once these program plans are made more clear. Since this is not expected in other areas of the world, (in Japan, China, or Europe), the wider scenario is starting to favor non-US stock markets as these areas are more likely to continue adding stimulus well into next year. Because of these factors, spread betting traders should pay special attention to central bank commentary, as this will likely garner more of the market’s attention than either macro data or corporate earnings. Any suggestion that stimulus will end should be viewed as an opportunity to sell stocks, while any indication that stimulus will continue should be viewed as an opportunity to get back into the long term uptrend in equities.
The S&P 500 saw short term impulsive breaks to the downside, signalling that a potential top is in place near the all time highs above the 1680 level. Clearly, the index remains a buy on dips at this stage, and the first level of support now comes in at 1590. This area offers some great risk to reward for long positions but if we do see a downside break here, the bias turns sideways with the next downside test of support at 1530.
The FTSE 100 moved lower with the S&P 500 higher and the FTSE has now formed a clear downtrend channel on the medium term charts. Momentum is clearly centered on a downside test of support turned resistance at 6440, so we will need to wait for a corrective move into these areas before considering new long positions in the FTSE.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.