S&P 500 Hits another New Record Corporate Earnings, Central Bank Policy
Stock markets closed higher for the third week in a row, and the S&P 500 hit another new all-time high this week. The reasons for all the optimism are coming largely from consistent improvements in corporate earnings, stronger economic data and supportive monetary policy from most of the major central banks around the world. For the past few weeks, stock markets have seen consistent uptrends because all of these factors are coming together at the same time. We have seen very few misses in terms of earnings releases and this is encouraging investors to move out of safe haven assets (such as gold, which is still trading new yearly lows).
Some investors remain skeptical, however, as many of the earnings expectation surveys show that market analysts ar expecting weaker results. Because of this, it does not actually take much progress in order to beat those expectations. The positive surprises have been sending stock values higher, but at this stage many analysts are suggesting that stocks are overvalued, with some even suggesting a bubble is in place.
Historically, the summer period is a weaker period for stocks, as one of the most common market maxims is “Sell in May, and go away.” At this stage, it is unclear whether or not we have actually seen a top in stock values but risk to reward favors the downside and with prices making new all time highs each week, the Sell in May phrase might be more true this year than at any other point in time. Strong economic data and central bank policies (rate cuts from Australia and the Eurozone) continue to be supportive of the wider trends, so if we see any changes in these areas, expect stocks to drop on profit taking at these more elevated levels.
The S&P 500 continues to see significant impulsive breaks and rallies above key psychological levels last week, and prices rose to new all time highs in the region of 1630. We continue to see only minimal pullbacks from these elevated levels, so there is increased probability that we will see corrective pullbacks next week. On the hourlies, prices are diverging even further from the 100 and 200 period moving average, and the next major level of support can now be found at 1610.
The FTSE 100 is matching the moves seen in the S&P 500 with even higher highs posted on the week. This move higher was signalled by the symmetrical triangle break that we have discussed in previous reports, so this bullish rally should not be a major surprise. Support now comes in at 6530, so we will need to see a downside break here in order to change the bias and take pressure off of the topside. Either way, the index is still a buy on dips, with the first area of support now seen in the 6530 buy zone.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.