S&P500 IS LIKELY TO HOLD ITS LATERAL ASCENDING TREND
The S&P500 stock index is likely to hold its lateral uptrend, which started back in the beginning of 2013, when the "Fiscal Cliff" debate between the White House and the US Congress was resolved in a positive way. The event also marked an "official" end of consequences of 2008-2009 financial meltdown, eventually sending key stock indices above their 2007 peaks.
Since then S&P500 index did not experience significant volatility and traded above its 10- and 5-year uptrend borders (measured by upper 1st standard deviation from 10- and 5-year moving average accordingly). The index also traded within an ascending channel on quarterly basis (within 1st standard deviations from 66-day mean) most of the time.
Thus at the current state of affairs, when US economy has recovered most of its losses from the 2008-2009 financial meltdown (except the housing market that is still catching up, of course) - it looks very likely that the key stock index will continue its lateral uptrend.
The overall positive situation is confirmed by VIX, staying well below 20 level. The VIX is a volatility index which increases if the premium for put options on S&P 500 futures rise, in other words, when market participants expect a plunge in the S&P 500 index. VIX below 20 means there are no such overwhelming expectations at the moment.
There are, of course, some key conditions and risks to monitor before making a decision about investing in the index.
Primary risk comes from the fall in oil prices, surprisingly. In general, lower oil is a positive development for the US producers (if it is not caused by a global financial crisis, that is).
Lower oil means cheaper resources and thus higher margins.
The negative effect, however, comes from inflation measures, as the late 2014 fall in oil prices has led to a very significant decline in both CPI and PPI measures, with CPI falling to around 0% on y/y basis. Such risk of deflation can lead to a slowdown in US domestic consumption, which is vital for the US producers composing the S&P Index.
Thus as a potential buyer of S&P500 one would like the oil prices to remain stable in observable future. Please see the related idea on oil for more details.
Second risk is a derivative from the oil risk and comes from strength of US dollar, which appreciated broadly against all key foreign currencies (EUR, GBP and JPY) since the oil prices started their fall mid-summer 2014.
On one hand higher dollar means that it is more and more attractive to hold dollar-denominated assets, S&P 500 index among them.
However, even further appreciation of US dollar means more trouble for American exporters composing the index. US exports are becoming even less attractive on the global market in terms of prices.
Dollar appreciation is already having its influence on US exports data, thus a potential buyer of the index would want the US dollar to remain stable (along with oil prices). Please refer to the related idea on EUR for more information.
Another risk to S&P500 at the moment comes from other Dow Jones averages, such as Transportation Average and US Paper Index. Both averages underperform S&P500 at the moment. There are good reasons to watch those seemingly unimportant indicators.
Transportation is one of the key industries of US economy, while paper index traces performance of companies involved in packaging of all the goods shipped. If fewer goods are being packed and transported, fewer goods are being bought, which in turn means a slowdown in the US economy. Idea is that if stocks of US transportation and paper companies decline in advance of broader market indices, it could well signal a slowdown in the US economy not yet accounted for by the general investing public.
Thus a potential buyer of S&P500 index would want these two indicators trending at least laterally, not falling. Please see related ideas on TRAN
Since then S&P500 index did not experience significant volatility and traded above its 10- and 5-year uptrend borders (measured by upper 1st standard deviation from 10- and 5-year moving average accordingly). The index also traded within an ascending channel on quarterly basis (within 1st standard deviations from 66-day mean) most of the time.
Thus at the current state of affairs, when US economy has recovered most of its losses from the 2008-2009 financial meltdown (except the housing market that is still catching up, of course) - it looks very likely that the key stock index will continue its lateral uptrend.
The overall positive situation is confirmed by VIX, staying well below 20 level. The VIX is a volatility index which increases if the premium for put options on S&P 500 futures rise, in other words, when market participants expect a plunge in the S&P 500 index. VIX below 20 means there are no such overwhelming expectations at the moment.
There are, of course, some key conditions and risks to monitor before making a decision about investing in the index.
Primary risk comes from the fall in oil prices, surprisingly. In general, lower oil is a positive development for the US producers (if it is not caused by a global financial crisis, that is).
Lower oil means cheaper resources and thus higher margins.
The negative effect, however, comes from inflation measures, as the late 2014 fall in oil prices has led to a very significant decline in both CPI and PPI measures, with CPI falling to around 0% on y/y basis. Such risk of deflation can lead to a slowdown in US domestic consumption, which is vital for the US producers composing the S&P Index.
Thus as a potential buyer of S&P500 one would like the oil prices to remain stable in observable future. Please see the related idea on oil for more details.
Second risk is a derivative from the oil risk and comes from strength of US dollar, which appreciated broadly against all key foreign currencies (EUR, GBP and JPY) since the oil prices started their fall mid-summer 2014.
On one hand higher dollar means that it is more and more attractive to hold dollar-denominated assets, S&P 500 index among them.
However, even further appreciation of US dollar means more trouble for American exporters composing the index. US exports are becoming even less attractive on the global market in terms of prices.
Dollar appreciation is already having its influence on US exports data, thus a potential buyer of the index would want the US dollar to remain stable (along with oil prices). Please refer to the related idea on EUR for more information.
Another risk to S&P500 at the moment comes from other Dow Jones averages, such as Transportation Average and US Paper Index. Both averages underperform S&P500 at the moment. There are good reasons to watch those seemingly unimportant indicators.
Transportation is one of the key industries of US economy, while paper index traces performance of companies involved in packaging of all the goods shipped. If fewer goods are being packed and transported, fewer goods are being bought, which in turn means a slowdown in the US economy. Idea is that if stocks of US transportation and paper companies decline in advance of broader market indices, it could well signal a slowdown in the US economy not yet accounted for by the general investing public.
Thus a potential buyer of S&P500 index would want these two indicators trending at least laterally, not falling. Please see related ideas on TRAN
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