Hello traders
I hope you’ve all had a good week!
In last Friday’s post I explained the importance of seeing beyond the short-term noise to remain focused on the ‘big picture’. In the past few days we have seen a bit of volatility returning to the stock market following comments from US Treasury Secretary, Janet Yellen. On Tuesday she seemed to suggest that interest rates ‘may need to rise’, before later walking back her comments. Despite the media attention amplifying the former statement, there was surprisingly little movement in the bond market with the US 10 year yield in fact closing lower on the day. The takeaway from this is that the Fed is way behind the bond market in terms of its expectations for how soon rate hikes will come (and their terminal level), which is evident from the moves we saw accelerate earlier in the year.
Now, I began by referring to short-term volatility in the stock market. Here is an intraday chart of the S&P 500 Index, which now shows a slight gain for the week following the downside volatility midweek.
At one point the stock market was down around -1.5% intraday, before bouncing back. Companies including Facebook, Microsoft and Google (last week’s darlings following their blow-away earnings results) lost as much as -3%. In my previous post I shared a few of the Checklists which all seemed to point to gains for equities this month, with a host of clear positive scores. This is the reason why I felt it was so short-sighted to be selling following Yellen’s comments, which in the end turned out to be little more than noise.
Firstly, here is our Business Cycle Checklist which shows further improvement this month to a score of +4. With such a strong score this should certainly set the tone for the long-term trajectory of the US economy, corporate earnings and stock prices, as a product of that.
Here you can see this relationship plotted on the following chart. Stock prices (green line) follow a clear cycle (as per our Business Cycle Checklist score) based on the level of corporate profits (grey line). With the economy expanding (and earnings rising) the long term outlook for pro-cyclical assets remains positive.
Our US Equity Checklist confirms this and provides greater conviction in the anticipated direction of the stock market, helping us to look beyond any short-term noise. Having closed at a monthly record high last month, this most likely signals further gains in the month ahead.
This final chart really puts the earlier move in perspective. Having found support around 4150 and rallied right back, the path of least resistance looks to be higher targeting a move towards the Fibonacci extension level of 4350 in time. Furthermore, the market has now ‘reset’ with the RSI no longer being ‘overbought’ above 70, which was one of the few concerns posed by technicians last week.
Only time will tell how this all plays out, but to me, it seems like a mistake to day trade the news (or panic sell your portfolio) with such a clear bias currently. To learn more about our methods, and join me for more analysis in real-time, check out our MDT course and Trading Club pages where you can preview everything that we cover.
In the meantime, why not head over to our YouTube Channel for our latest FREE videos which I will be bringing to you each week in 2021! As there’s no charge for this content, it would be great if you could support the channel by leaving a comment and subscribing.
Have a great weekend,
James
Disclaimer: For educational purposes only. Even though we do our best to provide reliable data, you should not trade based on this information.
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