S&P 500 Breaks 1800 as Earnings Sentiment Supports
Spread betting markets continues to see new record stock valuations as prices pushed through major valuation levels last week. In my previous markets report, I suggested that the “S&P 500 is knocking on the door of 1800” and the expected break here seen last week is being supported by continued commitment to central bank stimulus and renewed analysts forecasts that the next round of corporate earnings will show improvement.
At this stage, there seems to be nothing that can stop the rally in stocks that has marked most of the year. But at the same time, spread betting traders must remember that we are starting to head in to the end-of-year holiday period that is likely to lead to a slowdown in volatility. An environment like this can pose problems for heavily trending markets, and this is the case for a few different reasons. One, there is less of a reason for those still bullish to add to their positions. Two, there is actually an added incentive for those holding long positions in stocks to take profits before the end of the year.
For these reasons, establishing large long positions is risky at this stage because the market is much more vulnerable to downside corrections than extended rallies. Expect stocks to trade mostly sideways as we start to trade into the end of the month, with a slight downside drift to mark the generalized directional tone.
The S&P 500 continued to push forward and reach new record highs near 1805 into the Friday close. Most of the movement has been positive, however, so new long positions are risky until we start to see some downside corrections. To the downside, the first support level comes in at 1780, and if we do see a bearish break here we should expect losses to accelerate.
The FTSE 100 did not fare quite as well as the S&P 500 but prices are still holding relatively close to long term highs. The FTSE is starting to look vulnerable, however, after rolling over near 6740. This is now the level to watch on the topside, and if we do see an upside break there we can expect gains to accelerate. Overall bias, however, is for a modest downside drift for most of next week.
Price activity in the DAX resembles the S&P 500 much more closely, as the bullish surge continues after breaking critical psychological resistance at 9000. On the topside, the main area to watch comes in at 9210, and a break here will confirm that the bull trend is still in place. A downside correction could be extreme, however, given the strength of the rallies seen this year. Watch for a break of key support at 8980 as an early indication the uptrend is pausing. A break of 8980 suggests a new bear target below 8800.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.