SP500 cautious at current levels

Further gains for U.S. equity markets overnight with traders taking the more optimistic view that an agreement can be reached to avoid another government shutdown before the deadline of this coming Friday. Congressional negotiators have reached a tentative deal that includes U.S. $1.375 billion for a border wall, however it’s well short of the U.S. $5.7 billion that President Trump originally demanded. 

Trump must now decide whether to take the U.S. $1.375 billion on offer or potentially look at other options such as executive funding, or hold fast and risk another unpopular government shutdown. As much as I would like to share in the markets optimism that a deal will be reached within the next 48 hours, President Trump appears caught in a rock and hard place on one of his key U.S. election promises, and it would seem unlikely we have heard the last of this matter.

Also catching the eye overnight was the release of U.S. CPI data. If we think back for a moment to the January FOMC meeting two weeks ago, Federal Reserve Chairman, Jerome Powell made it clear he would now need a “reason” to hike rates and that the only reason would be rising inflation. 

Data overnight showed that the average growth rate of U.S. core CPI over the last 3 months has climbed to about 0.22%, which is consistent with a 3-month annualized rate of growth above 2.6%. This figure puts CPI at its strongest rate of 3-month annualized growth since early 2018 – a time when the U.S. economy was bathing in the economic sunshine provided by the stimulus provided by President Donald Trump’s tax cuts and pre the U.S.-China trade war notching up a gear.

Economists pointing out that should core CPI continue to average around 0.20% or higher per month, the year over year rate will rise towards 2.4% into the second half of 2019. Should the average monthly growth rate print at 0.25%, it would push the rate of core CPI to almost 3% year over year by the end of 2019. 

Little wonder then that U.S. interest rate markets, post the data release, immediately began to price an interest rate hike into the back half of the 2019 fed funds futures curve. 
But hang on just a moment, wasn’t the Federal Reserve moving to on hold one of the main reasons behind the recent rally in U.S. equities? 

With that thought in mind let’s review two of the key U.S. equity index charts. While the S&P500 closed marginally above the 200-day moving average of 2745 overnight, the high beta Nasdaq remains below the 200-day moving average at 7050. The daily candles that formed overnight in both indices often warn of a loss of upside momentum and that a possible counter-trend pullback is looming.

Using the S&P500 as a guide, there appears to be an almost complete 5 wave rally from the December 2316.75 low. A break and close below interim support at 2680/75 would indicate that a deeper corrective pullback towards the 2600/2550 area is close at hand.

While the base case is for a near term pullback, keep in mind that should both the S&P500 and the Nasdaq build acceptance above their respective 200-day moving averages in coming days, it would allow for the rally to extend towards the next layer of resistance 2815/25 area.

Source Tradingview. The figures stated are as of the 14th of February 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation