S&P 500 Post Biggest Declines of the Year
Spread betting markets saw some declines in broader sentiment levels, and the S&P 500 posted its worst close since January as investors start to show concern over the elevated valuations that are currently seen in equities. It has been no secret that price levels in most stocks are currently found to be trading at long-term (or even record) highs, so some declines from these areas should not be coming as a complete surprise for spread betters that are actively trading the markets.
Going forward, the real issue that should be concerning traders is whether or not companies will actually be able to live up to the consensus analyst expectations for quarterly earning performances. On a price-to-earnings basis, there are some legitimate reasons to worry as we are not in an economic climate where businesses are being forced to deal with reduced monetary stimulus from the US Federal Reserve. If we do start to see some downside revisions in the earnings expectations for most of the blue chip names in stocks, it could easily mean that we will be seeing a top in equity markets.
This would make it difficult to start establishing new long positions in stocks, as there is much less upside potential and a good deal of downside risk. For these reasons, it will be important for spread betting traders to pay close attention not only to the final results in these areas but also in the early projections as they start to develop.
The S&P 500 is starting to show cause for concern after breaking critical support at 1840. This signals the fact that a short term top is in place just below 1900. From here we are likely to see a gradual downside drift for most of next week, as there is no real support until we see a clear test of the 1800 level. Traders can start to consider long-term positions in this area but these positions should be kept small given the larger downside risk. A break of 1900 is needed to reinvigorate the uptrend.
The FTSE 100 is now trading toward the middle of its medium term range and this presents some opportunities for those that are ready to start getting long on the index. The initial declines from the recent highs showed a good deal of momentum, so traders should wait for a further drop back into 6450 before looking to get long again. This trade looks like it is ready to provide on of the better values in stocks if 6450 trades.
The DAX is looking like one of the most erratic trades in stocks, as volatility has been seen in both directions. The index has been filled with false breakouts (both up and down), so it is looking like this area of the market should be avoided until we start to see it trade with a bit more consistency.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.