US500

Wall Street rallied yesterday on the back of weak employment data, as investors jumped onto the theme that the Fed may have reached ‘peak hawkishness’.

We have seen similar moves fade in this bear trend…

So, the S&P 500 is rallying to fresh unchartered territories today. Where do we go from here? Well, the monthly chart suggests onwards and upwards.

The S&P 500 is now just 20 or so points away from reaching its previous record high of 2134/5 achieved back in May 2015. Will it reach or surpass this level remains to be seen, but with oil prices rallying, Chinese data improving slightly and central banks remaining uber-dovish, I wouldn’t bet against it. That being said, profit-taking may cause the index to pause here for a while. So a short-term pullback wouldn’t surprise me either.

U.S. stocks and crude oil prices were quick to bounce back from the initial wobble in the immediate aftermath of the official US weekly oil inventories report from the EIA as traders (and algos) responded to the headline build of 1.31 million barrels. Clearly this wrong-footed many speculators who had expected to see another drawdown following last week’s 3.41 million barrel decrease in US oil stocks. On a side note, this is the second time in as many weeks that the API has got it completely wrong, assuming of course that the official numbers are correct (or less inaccurate)!  But the other aspects of the oil report were not too bad at all. For one, oil production fell once again. For another, there were larger-than-expected draws in distillates and – more importantly for this time of the year – gasoline stocks as refineries processed more crude, which is normal for this time of the year as the summer driving season is underway.

As we go to press, stocks and crude oil prices were off their lows as the sellers eased off the gas ahead of the weekend. The European markets had started Friday’s session on a downbeat note, weighed down by a slump in share prices of carmakers while miners were lower due to a slightly weaker oil price.  The winning streak on Wall Street came to a halt on Thursday as the Dow fell back below 18,000. After a good run of form, profit-taking was probably one of the biggest reasons behind the sell-off in the US markets with many investors closing out their profitable positions ahead of key earnings from the likes of Apple, Facebook and Google. Although the first quarter US earnings season got off to a bright start with banks in particular reporting better-than-expected numbers, a few companies reported weaker earnings on Thursday. Meanwhile a forecast of falling chip shipments by Qualcomm weighed heavily on Apple shares on fears of reduced demand for its products. Apple is now more than 20 per cent below its 52-week high, so it is in the official bear market territory. After the closing bell on Wall Street, Google’s parent company Alphabet published its quarterly results, as did Microsoft and Starbucks. Although Alphabet reported rising earnings and revenue, both numbers still disappointed the high expectations. Its shares declined about 5-6 per cent in afterhours trading. Earnings from Microsoft and Starbucks also disappointed, which weighed further on US index futures.

Today marks the last trading day of March and also the end of first quarter of 2016, and what a roller-coaster quarter it has been for U.S. and global equities! A big sell-off at the start of the year for the S&P 500 was followed by a modest rebound and then another sell-off which failed to penetrate the prior low, leading to a sharp bounce in the second half of February which has continued throughout March. Sentiment turned sour at the start of the year after the Fed signalled it would embark on a rate-hiking cycle in 2016 and as growth in China continued to slow down while oil prices dropped to fresh multi-year lows on excessive supply worries. Investors fretted over the impact of a stronger dollar on US exports and earnings, and the potential for currency crises in some emerging markets on expectations that investors may move and park their funds in the US.

Ahead of the FOMC statement, the charts of the S&P suggest there is a possibility for a pullback in US stock markets, though at this stage there are no confirmation signs to suggest this will indeed be the case. Bullish speculators should therefore proceed with extra caution, while the conservative bears may want to wait for confirmation.  The outcome of the FOMC statement and Janet Yellen’s press conference will no doubt have an impact on the foreign exchange markets, as my colleague Matt Weller wrote in his preview yesterday. For stocks, a hawkish surprise may be a negative outcome, while a surprisingly dovish tone could be positive.

What a volatile day it has been in the markets. Stocks initially rallied after the European Central Bank decided to cut interest rates across the board, increased QE by a bigger than expected €20 billion euros per month and expanded the universe of eligible securities to purchase through its QE programme. In the words of my colleague Matt Weller, this was the “big bazooka” that many traders were hoping to see. However, at the press conference, the ECB President Mario Draghi said he didn’t expect to cut interest rates further. This was enough to send German 10-year bond prices tumbling and yields to jump, nearly double from their lunch-time levels. The euro shot higher and stocks, which have been correlating positively with bonds, tanked.

The S&P reached and breached the key 2000 level on the back of today’s non-farm payrolls report. Traders’ initial reaction to the data was joy as they saw the 242,000 NFP figure flash in their screens but then realised wages were weak (down 0.1% month-over-month), so they sold stocks and the S&P tumbled. But then the markets recovered as traders bought the dip possibly because they figured that the Fed may hold off raising rates again this year. At the same time, the weaker dollar helped to lift oil prices to fresh weekly highs. This also helped to fuel the kick-back rally.  Confusion is the key takeaway point from this morning’s trade.

At the time of this writing, the markets in Europe are higher across the board despite a 5 per cent drop in China overnight, while US index futures are trading a touch weaker following yesterday’s sharp recovery. Britain’s FTSE 100 was the top performer, up a cool 2 per cent, thanks in part to a 10 per cent jump in shares of Lloyds and RSA following their earnings results. Miners and energy companies were trading higher due to yesterday’s sharp recovery in the price of oil and metals. Brent crude oil was holding its own around the $34 handle while WTI was at $32. Both oil contracts have recovered nicely following Tuesday’s drop, which was triggered by damaging comments from oil ministers of Iran and Saudi Arabia and after the American Petroleum Institute reported a sharp build in US oil stocks. However, the official supply data from the US Energy Information Administration, published yesterday, showed a different picture, with the 3.5 million barrel build in oil inventories being half the amount the API had estimated the day before. While a build is not normally good news for crude oil, prices rallied nonetheless as traders unwound their short positions they had accumulated the day before.

Last week, we took a look at the weekly chart of the S&P 500 and mentioned two very important support and resistance ranges: 1800-1830 on the downside and 1933-1950 on the upside. We said that while a breakout is a possibility, so too is range-bound price action within these large ranges and whatever the outcome, there should be plenty of trading opportunities to look forward to.Today, we are taking a closer look at the technicals on the smaller daily time frame and we can refine our levels even more precisely. On this time frame, it is actually clear that the potential resistance is in the 1945-1950 range (as opposed to 1933-1950 on the weekly), an area which has been tested already today.

It looks like the kick-back rally may well be over for equities with the major European stock indices hitting fresh lows as we go to press. The contingent agreement to freeze oil production at or near record-high January levels between some of the large OPEC and non-OPEC members this week failed to lift the oil market decisively. Although WTI prices appear to have jumped today, this is only because of the contract roller over (i.e. the April contract was trading significantly above the expiring March contract when the rollover occurred). Indeed, Brent was down about 1 per cent at the time of this writing. Bullish oil traders have been further frustrated by Thursday’s news of a build in inventories of US crude and oil products. Not that this was an unexpected outcome; rather, hopes were raised the day before by the American Petroleum Institute which had (incorrectly) estimated a surprise drawdown. So, nothing has been changed about the old but still relevant factor depressing oil prices: supply glut. The weaker price of oil was among the reasons weighing on the stock markets today, with European indices lower across the board and US index futures pointing to a weaker open on Wall Street later. Gold was higher on safe haven demand, as was the Japanese yen.

As we noted earlier, global equities have plunged today amid growing growth concerns and continues weakness in oil prices. In the US, the major indices are off by over 2-3 per cent each, led by sharp falls in consumer discretionary and financial sectors. The selling pressure could exacerbate if the indices break support. For the S&P 500, the key support is around 1820/30, which is where it bounced from in mid-January off. However, that move failed to materialise into a significant rally. Consequently, the index is once again heading back towards this key support area at the time of this writing. Although there is a possibility for another rebound here, some of the other major global indices have already broken their corresponding key levels and so the S&P could follow suit.

There was finally some relief for the bruised bulls last week after the stock markets staged a sharp recovery, raising hopes that the worst ever start to a year is now behind us. The rally was initially triggered by short-covering and a sharp rebound in oil prices, then by renewed dovish talk from the ECB President Mario Draghi. Regardless of the trigger, the rally ensured stocks would close the week in the positive territory for the first time in 2016 and what a relief that was after equities had endured the worst ever start to a year. But was it just that – a relief rally? Will more existing long-term investors use this as an opportunity to exit their positions? Or is this the start of another big rally?