Last week equities performed strongly shrugging off the discount rate hike by the Fed. The S&P 500 future climbed as high as 1111.00 before closing at 1106.25 on Friday. This week may prove slightly trickier for bulls as China re-enters the fold after a weeklong national holiday and some important consumer based data is released in the US.
From a technical perspective the S&P 500 future looks in much better shape that it did a week ago. On both Thursday and Friday last week the market closed above the technically significant level at 1103.25 pushing the chances of a further break higher this week. Further resistance lies to the upside around 1113.00 and beyond that at 1127.00, a breach of here would signal the market is ready to retest the 2010 highs at 1148.00. If the market was to fail around its current level and break back below 1103.25 it would be in danger of falling back down to the previously held daily uptrend at 1068.50. If the market was to break this uptrend a break of 2010 lows would almost certainly follow making a serious move lower likely.
Last week the markets overcame a large test when the Fed raised the discount rate and the markets continued to rally after some initial jitters. This has to be taken as a bullish sign although it would be easy to read a little too much into the market’s reaction. We believe the true test will come when the Fed changes its language in particular the removal of the phrase, “rates will remain exceptionally low for an extended period”. Until then the markets, particularly the equities, will trade safe in the knowledge of loose monetary conditions.
It is worth noting that last week’s equity rally was on the back of relatively light volume and several analysts have pointed to the European and US Indices Options expiry on Friday as a possible cause for the bullishness. We believe this may have been a contributing factor and that this week’s trade will tell us to what extent but with Consumer Confidence, GDP and Durable Goods orders all out this week we could see a real test of the current rally.
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