Stocks rally could run out of juice as S&P hits fresh record
Fawad Razaqzada October 28, 2019 12:03 PM
Ahead of a busy week, the US stock markets have opened sharply higher with the S&P 500 hitting fresh virgin territories. Once again it was Donald Trump who helped to spark panic buying after the US President said he expected "today will be a good day in the stock market," adding that "the China deal is moving forward ahead of schedule." Lo and behold, the markets gapped higher and have pushed upwards since, with the major averages tacking on gains of 0.6 to 0.9%. While it is may be a sea of green, I wonder whether the market has gotten too ahead of itself. With Google, Facebook and Apple earnings to come and not to mention the upcoming Fed and BoJ meetings or the potential for further Brexit drama, sentiment could turn sour very quickly.
Trade-related headlines likely to have diminishing returns
Indeed, there is a possibility that the US-China trade optimism is now fully baked in or very close to being so. In any case, I certainly think trade-related headlines will at best have diminishing returns going forward. Thus, for the markets to remain at these lofty reasons, we will need to see some big surprises in company earnings/outlooks or more central bank loosening. Again, I can’t help but think rate cuts might be limited going forward. Meanwhile the recent slowdown in global macro data points to weaker earnings growth. So, apart from momentum I am struggling to think where the next support will come from in order to keep the markets elevated. Granted, we could still see several further green days on Wall Street, but ultimately the macro concerns might derail the rally. It should be noted however that I am not necessarily trying to call the market top – rather, I think a correction looks imminent. I don’t have too strong a long-term view, anyway.
Should the Fed cut rates with markets at record highs?
In terms of the Fed, while it looks set to cut interest rates by another 25 basis points on Wednesday, the need for doing so has arguably been reduced with the stock markets at record highs again on apparent progress in the trade talks between the US and China. Still, the FOMC wouldn’t want to cause unnecessary turmoil in the markets by not acting now given the recent slowdown in global economic activity. However, if the Fed decides against cutting or provides a forward guidance which is not as dovish as some expected, then the stock markets could fall back in the second half of the week.
S&P approaching rising wedge top
Source: Trading View and FOREX.com. Please note this product may not be available to trade in all regions.
From a technical point of view, with the S&P 500 breaking to a new record high today, the bears have little or no reason to stand in the way of the rally at the moment. The bulls are in control and will be taking advantage of any dips to reload until this strategy stops to work.However, when we have the first sign of bullish exhaustion or reversal stick on the daily time frame, then we could see a sharp drop in the markets as the bulls rush for the exits. While it is not a good idea to pre-empt a potential sell-off, it is a good idea to highlight certain areas where the sellers may step in. One such zone is around 3050-55 where the top of the rising wedge pattern comes in top play. Otherwise, the bears may wish to wait for a key support level to break and then look to get on board on the re-test of such a level.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.