Is The S&P500 Ready To Consolidate?

Marius Paun | London, UK | Senior dealer | Friday, 23rd April 2021

The US stocks have been on a roll for the best part of the last year with all three major indices hitting fresh all-time highs on a regular basis lately. Take a look at the S&P chart below which speaks volumes for investors sentiment. Every now and again things get frothy and a pullback follows. At that point there was plenty of speculation about what could derail the current trend. It was either rising yields or inflation pushing the Fed to hike sooner rather than later. A stumble perhaps but so far US stocks and S&P in particular always came back.

Funny enough, the pessimists are saying that more than 90% of the companies in the S&P are now trading above their 50 day moving averages. It’s the new scaremongering. But guess what, more than 90% of the times this has occurred in the past, the S&P was higher a year later with gains upwards of 15% on average. Furthermore, the US GDP growth rate was recently upgraded to 6.5% which would make it the fastest rate in 35 years. The Fed reiterated the promise to keep interest rates near zero for the foreseeable future amid expectations of a record pent-up demand and massive amount of monetary stimulus. It’s the reason why Jamie Dimon of JP Morgan said in his annual letter to shareholders ‘we could see a Goldilocks moment in the economy with a multiyear boom lasting into 2023’.

We saw inflation figures a few weeks back showing a rise, but not enough to rattle markets, so far anyway. Consumer prices in the US rose 2.6% annually during March compared with 1.7% the month before and surpassing expectations of 2.5%. This time last year, prices tumbled as we were heading into a pandemic induced lock down. So, the base was low, which means anticipation this time was always going to be higher than usual. The market reaction was rather muted as if investors were already seeing ‘the surprisingly big inflation’.

Nonetheless, inflation is the outcome that the US Fed wants, almost at all costs. Politically, it is the lesser evil to get rid of the massive debt so they’ll probably try to spur it on until they get it. If and when that happens, they’ll probably pretend it’s not at dangerous high levels because they need to let it run for a while, to ‘eat’ a good chunk of that debt…. Sounds extreme? Time will tell.

Since we are discussing what could eventually derail the incredible rally in S&P, yesterday President Biden said he wants to increase to almost double capital gains tax with details revealed next week. It will increase from 20% currently to 39.6%. Investors were quick to crystalise some of their profits to avoid paying the higher rate later on. However, John Authers from Bloomberg crunched the numbers reporting that Obama also increased capital gains tax at the end of 2012. S&P went sideways for a few months but eventually 2013 was a very good year for the index.

He added that momentum stocks are the most vulnerable after they went up the most. Taking profits off the table in momentum stocks is also spurred by the fact that gains come from capital appreciation rather than income (dividends). So, the so called ‘Great Rotation’ from growth into cyclicals is likely to continue, supported by a resurgence in bond yields.

President Biden also pledged to cut emissions by 50% by the end of 2030 during a virtual climate change summit. It means increased regulation and higher costs on the horizon. Going forward, there is a newly proposed $1 trillion ‘families plan’ to be unveiled later this month and the corporate tax associated with it. Could that pose an extra threat to the current rally in stocks?

The chart shows the bulls are steadily in control with yet another all-time high at 4191 reached on April 16th . The short-term moving averages have flattened somewhat but the long-term ones are still pointing upwards. So a period of consolidation around the current levels is quite possible.

On the way down the next immediate support is 4120 which held during the last few sessions. A cross below that will bring into focus minor support at 4090 followed by solid resistance turned support at 3960. On the way up bulls will eye a close above 4190 to have enough conviction to test 4200 mark.