S&P within Striking Distance of All-Time Highs on Strong Jobs Data
Global stock markets closed higher for the week as supportive economic data and optimistic central bank meetings stoked risk sentiment and brought investors back into equities despite the historical elevated levels we are seeing at the moment. The S&P 500 is currently trading less than 1% from its all-time highs (posted in 2007), and a good part of this move was seen into the end of the week, when key economic data was made available to the trading markets. Specifically, the ISM services data and monthly employment figures showed strength well beyond market expectations and signaled that the wider global recovery is still in effect.
Both the Dow and the S&P 500 have traded in positive territory for the last six sessions (the best winning streak since January), but with the Dow already trading at all-time highs, traders are now looking for a top to form at some point near term but with most of the economic data coming in firmly, it is not completely clear when this top will be see. One potential catalyst for stock market declines could be seen if the US Federal Reserve continues to suggest that stimulus programs will no longer be necessary, and with the data releases seen last week, statements like these are becoming increasingly likely. Early on in the economic recovery, most of the cited concerns centered on the housing market, but now that home prices have stabilized, the Federal Reserve has started looking more into the state of the labor market. With the latest jobs figures, some of these concerns will start to disappear and if this view is openly expressed, global stock markets will likely see some selling pressure.
The S&P 500 continues on its massive rally and has shown very little in the way of downside retracements since finding a bottom at 1480 at the end of last month. Clearly, the long term target is seen at the all-time highs of 1565, which are now a relatively short distance away. But while we are still seeing indicator readings with more room to extend, there is relatively little upside potential when compared to downside risk, and this favors short positions in the medium term (using entries above 1555). Short term traders can still get long in anticipation of a 1565 re-test, and the first level of support comes in at 1537.
The FTSE 100 closed at its highs for the week (at 6480) after coming through previous historical resistance at 6400 without much difficulty. We are seeing an even stronger rally in the FTSE than in the S&P but there is a much larger scope for gains here because the all-time highs in this index are not found until we rise back above 7000. The FTSE is clearly a buy on dips, with the first level of support now seen at 6380.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.