Equity Index overview
26th October 2009
Equity Index Overview
Over the last week S&P 500 futures predominantly traded sideways, although they did find time to post new yearly highs at 1099.00. In a week dominated by earnings, which on the whole were strong, a negative GDP figure out of the UK which was expected to be positive and signal a transition out of recession did capture the markets attention.
Thoughts from the trading floor
Last week the Dow appeared unwilling to break clear of the 10,000.00 level which appears to be acting like a magnet for trading activity. In addition despite the S&P 500 posting new yearly highs it posted a weekly shooting star in the Dec. future. The question that technicians are currently asking themselves is whether the equity markets still have room on the upside before any large pull back occurs. From a bull’s perspective the target of 1245.00 for the large inverse head and shoulders formation in the S&P 500 has not yet been reached. The breaching of the 10,000 mark in the Dow will also be used as an argument for continuing upward momentum however the large resistance levels particularly in the NASDAQ 100 will concern them. The resistance in question is the 61.8% retracement at 1782.86 and a further daily level at 1798.75. Overall the technicals are not particularly useful in backing up a bullish or bearish argument, still as there is no clear reversal patterns it is hard to be anything but bullish from a pure technical perspective.
The fundamental picture is really no clearer, despite almost all data pointing towards a bottoming process, particularly within housing and consumer confidence traders still remain weary. The reason for this is simple, they are unsure how much of this improvement is simply down to the huge amount of stimulus being pumped into the economy, and what the repercussions will be when it is removed. We already know that fiscal stimulus is limited and at some stage over the next few years monetary policy will turn, but will the private sector be able to pick up the slack? At the moment most would agree that the private sector is a long way from where it needs to be to continue pre-credit crunch growth and that is what has prevented a V-shape recovery. For this reason we believe it may be when central banks start laying out their plans for removing stimulus in greater detail that equity indices will find themselves under pressure.
Important events this week.
- Tuesday: Consumer Confidence US
- Wednesday: Durable Goods Orders, New Home Sales US
- Thursday: Exxon Earnings, Initial Jobless, GDP Annualised US
- Friday: Personal Income, Chicago PMI, Michigan Confidence US
Bull view
Bulls will not fear the technicals at the moment and will be overall be happy with the latest round of earnings as many companies upped their guidance. A strong showing in the fundamental data released this week will further aid their cause in a push higher.
Bear view
Bears will still be hoping that a second wave of weak fundamentals comes to their aid as they cling to the idea of a double dip recession. The Dow’s failure to significantly break the 10,000 mark will not have escaped their notice and may signal the time is right for a pullback.
Futex view
We believe that the end of the earnings season may lead to a period of profit taking that will result in a pull back in equity markets. We also think that the timing of the removal of stimulus will prove crucial if we are to avoid a double dip scenario.
