There will be lots of activity affecting the U.S. stock market, and especially the S&P cash index (SPX) this week.
Home sales Monday, GDP numbers Tuesday, the Fed Open Market Committee minutes Wednesday, jobless claims Thursday, Non-Farm Payrolls on Friday, earnings reports all week … the hits just keep on coming.
Add to that the ferocious geopolitical risks. Wars – actual shooting wars – in Ukraine, Syria, Gaza, Iraq – and threats of more from all over the globe. Yikes! But does any of this really matter to the market?
Probably not. Sometimes just a whiff of gunpowder and crisis is enough to send the market skittering like a frightened deer. And sometimes it marches blithely on, ignoring events that turn normally cold-blooded traders into palsied cowards running for the exits.
We think it is time for blithely marching on, with everybody buying the new highs. Consider:
• The S&P 500 cash index (SPX) is in a strong uptrend that has established firm support at the 1950-1940 level. The overhead resistance around 1985-2000 prevented the SPX from advancing last week but unless we break below 1940, there may be some short-term hiccups but the uptrend rules.
• The failed range breakout last week – new highs for the first three days, then a slump back to the previous week’s close – leads us to expect another – and we think successful – breakout attempt is coming.
• We are entering the cruellest month for stocks. August is usually the worst month of the year for returns. But seasonal patterns don’t seem to matter so much this year. Remember sell in May? How did that work out? We’re up 170 points from the April low. Seasonality could postpone the SPX rally and lead it to go sideways in the short term. We don’t think it will cause any permanent damage.
This Week
The July monthly options will expire on Thursday. SPX needs to make some big swings to squeeze the premium out of both calls and puts. Because the SPX has an intermediate-term overbought condition, we may see a small intermediate-term pullback soon.
SPX had a fake range breakout movement last week. The price broke 1985.59 resistance to make new highs around 1991.39, but it was unable to close above 1985.59 on Friday. Short-term profit taking could delay or disrupt the 3rd push up we are expecting (see chart).
But we don’t change our estimate of a price target around the 2045 area for that third push up, as long as SPX holds above 1940 level. But if SPX breaks below 1940 this week, it will change the short-term outlook.
SPX Daily Chart to July 25, 2014
