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S&P 500 update

By David Morrison  |  05/04/2018 14:31
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S&P 500 update 

This article looks at what's driving the moves in the S&P 500 and looks at the latest daily chart



As noted in last week’s market wrap, there was a danger that the long holiday weekend and the coincident end of quarter could see additional volatility and “some eccentric moves” across global equities. In fact, US stock indices rallied into Good Friday but subsequently slumped on Monday as traders returned to work. Yesterday brought another bounce, but nothing big enough to reverse the damage inflicted on Monday. Then, ahead of today’s open, global indices sold off sharply again. Investors rushed to hit the “sell” button after China upped the ante by announcing its own raft of tariffs in retaliation for Trump’s actions last month. Of course, there shouldn’t have been any surprise that China would hit back. But last week it looked as if China was prepared to make a token response with the imposition of $3 billion-worth of tariffs compared to Trump’s $50 billion. Now China has responded more aggressively, matching Trump’s tariffs in size. The big surprise appears to be China’s inclusion of soyabeans in the US imports it’s targeting. On one hand this is designed to hit the US farm states that voted for Trump in 2016’s Presidential election. However, it should also drive up food and feed costs in China, pushing up inflation and risking a backlash from a population where food costs make up a significant percentage of consumer spending. The fear is that the gloves are now off and that this trade war could escalate quite rapidly now causing significant damage before both sides eventually call a truce.

This comes on top of the continued sell-off in tech stocks. Facebook and Amazon have led the decline. The former is fighting a desperate PR battle after it was exposed as selling on user data while Amazon has fallen sharply after President Trump took aim at the company in a series of tweets. Tesla’s stock has also suffered from disappointing production numbers and safety fears. Overall, there are signs that portfolio managers are anxious to lighten up their exposure to tech stocks in general, particularly as this sector has driven much of the rally since November 2016.

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Soon after Wednesday’s US open the S&P 500 was trading back below its 200-day exponential moving average (EMA). This has opened up concerns that the index could now fall back to retest the low around 2,530 hit at the beginning of February. At the same time the 21-day EMA has crossed below the 100 putting further downside pressure on the index. However, many investors are still looking for fresh buying opportunities, convinced that the “buy the dip” strategy that has worked so well for so long will continue to be profitable. In this regard the bulls will be hoping that recent price action has much in common with the sell-off seen in early 2016. This was when China’s second currency devaluation in less than six months led to a corrective sell-off which was promptly reversed. That may be so. But there’s always a danger in trying to catch a falling knife while trying to identify an obvious bottom. And this time round we have a Federal Reserve which is not only further down the line when it comes to rate hikes, but also removing monetary stimulus as it reduces its balance sheet.

Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and GKFX accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.
 

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