S&P 500 at 5-Year High on Continued Earnings Strength
The S&P 500 closed higher for the 6th week in a row (the best weekly performance since August), as corporate earnings continue to show strength and policymakers in the Eurozone were seen making headway in their latest proposals for budget programs in indebted regions.
The S&P closed just under 1520 for the week, its highest level in 5 years. The Index is now trading just 3% below its all-time highs of 1565, which were recorded in October of 2007. Roughly three-quarters of the 340 companies in the S&P 500 that have reported earnings thus far have beaten analyst expectations and this trend looks to be supportive for global stock values in the near term.
Positive factors were seen in other areas as well, and stocks rallied after budget agreements in the US and Europe boosted investor confidence and removed some potential event risks on the political side. At this stage, there is no significant fundamental reason to sell stocks, and this assertion is being supported by the fact that price-to-earnings ratios are holding below 15, which is lower than the 50-year average of 16.6. This essentially means that the all time highs in some of the major stock indices are clearly within reach and that the long term uptrend that is seen has fundamental elements that are supportive, even at these elevated levels.
Switching to “Buy on Dips” Strategies
From a fundamental perspective, central bank efforts and corporate earnings releases have been suggestive of a sustained bull rally throughout 2013. From a short term technical perspective, however, chartists are starting to grow concerned as many technical indicators are signalling that prices are overbought and in need of a downside correction. For spread betting traders, this is likely to mean that many will start turning to “buying on dips” strategies, where short term downside corrections are use as opportunities to get back into the longer term uptrend.
Next week, we have a quiet data calendar, with no major releases out of the US, manufacturing data out of the Eurozone, and GDP figures and central bank meeting (deciding interest rates) in Japan. Looking at the earnings calendar, we have only second-tier companies reporting and this is starting to look like an opportunity for investors to start taking some profits at these elevated levels in stock valuations. Because of this, we could see some downside momentum this week before spread bettors look to re-enter the markets with bullish positions.
The German DAX saw some selling pressure last week after reversing from the yearly highs now seen at 7880. The next major level of support to the downside can be found at 7460, so there is some scope for the bearish momentum to continue next week. Short term traders should look for rallies to sell (below the hourly time frames). Medium traders should look at 7460 as a good level to start building buy positions but these positions should be gradual (use scaling methods) as profit-taking could create further declines, but only a break below 6960 would change the long term bullish bias.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.