The S&P500 cash index (SPX), the measure of large-cap companies in the US, bounded forward last week on the strength of yet another reversal from the Federal Reserve.

The index closed at 2072.78 Friday, up 36.84 points for net weekly gain of 2%. The market rose 30 points from Tuesday’s low to Wednesday’s high, thanks to extremely dovish comments from the Chair, Janet Yellen – no rate hike in April, although she didn’t say it that way – then fought off a retracement Friday to close at the highest level in 2016. We are now positive for the year.

None of this has much to do with real economic activity (the estimated earnings for the SPX are down, even as valuations rise to new heights) and everything to do with the Fed.

Last week there were more than half-a-dozen appearances by fed officials, several of whom were arguing for a rate increase. But the only one that counted was Yellen, who pretty much dumped any talk of rate increases and sent the market back to the moon, Alice.

What worries the Fed is not inflation, but the opposite, deflation, and especially deflation (a loss in value) of financial assets. This is no surprise, because deflation helps savers and hurts borrowers… and we all know who the world’s biggest borrower is.

It is not clear that we have entered a deflationary phase, but the mere prospect is enough to make Central Bankers eager to jawbone markets to new highs…

It seems bizarre, but one of the things they may be watching is something called the Bacon Cheeseburger Index, developed (with tongue in cheek, we suppose) by Convergex.com.

The BCI tracks the cost of the commodities in your lunch, and believe it or not, they are going down. Deflation!

Says Convergex:

Thanks to price declines in all three cholesterol-laden commodities, a bacon cheeseburger now costs 5.1% less than a year ago.

A look back at this index to 1990 finds that it is actually a decent indicator of deflation risk. Prior periods when the BCI turned resoundingly negative (3 percent or more) since 1990 include: 2009 (Financial Crisis), 1998 (EM/Long Term Capital), and 1992 (lead up to Iraq Invasion).  In each case, the Fed was cutting interest rates, not raising them.

Hey, it’s as good a guide as anything else in a time when markets are openly manipulated. Let’s have lunch.

And another thing…

Forty years worth of files from a big-time Panama law firm that specializes in hiding money for the rich and the criminal have been given to a German newspaper.

There are many politicians and former national leaders named, and some heads may roll, first among them the premier of Iceland. Russian and Chinese leaders are also implicated.

But so far nothing has been published about anyone in North America, which makes the whole caper smell fishy. We can’t believe US billionaires don’t try to hide their money. We’re thinking false flag.

This week

If it is the Fed that shakes the willows, expect some thrashing around this week. There are nine appearances by Fed presidents this week, including one by the Chair on Thursday, and the minutes of the last FOMC meeting will be released on Wednesday.

Maybe nothing else matters. However the SPX broke through important resistance around the 2050 level last week, and this is now likely to become support.

The index has given us a second buy signal (see chart) but is now moving closer to a resistance line made by the highs posted in last May and December.

It may meet some resistance there. But the market breadth is strong and while there may be some pullback, we don’t expect a major drop in price.  Any pullback is likely to be absorbed, and trend should go higher.

Resistance around 2100; support around 2015-2020.

Today

We use the S&P500 mini-futures (ES) for our short-term trading.

Friday the ES rallied from its10-day moving average line and made new closing highs. The price action was bullish and increasing daily volume supported the rally.

Today in the early morning we may see a minor pullback, but this pullback will likely be met by the buyers.

The 2050 broken resistance line is pivotal for April. 2075 and 2100 should be the upside testing areas for the buyers. 2040-50 will be reasonable targets for sellers.

The 200-day moving average line at the 2000 level will be a major short-term support. The trend is up, and buying on dips will still be seen today.

Major support levels: 2050-45.50, 2023-20, 2011.50-09
Major resistance levels: 2068.50-72.75, 2084-85.50, 2103-2098.50

Visit www.naturus.com to see Nat’s full outlook for the week ahead, free of charge.

Chart: SPX Daily chart to April 1, 2016

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