After Federal Reserve Chairman Ben Bernanke suggested that the Fed would not begin to reduce the amount of asset purchase anytime soon (known as the “taper”), equity, bond and commodity prices reversed direction and staged sharp reversals to the upside last week. In doing so, the S&P 500 Index (SPX) now appears to be aimed for a test of key trend line resistance that currently sits at the 1,706 level. Some observers suggest that last week’s sharp move to the upside was partially a result of “short covering”, particularly if front of earnings season.
From a technical point-of-view, it is interesting to note that overbought conditions are not currently present on weekly bar charts. This situation, in theory, increases the chance that a bullish “breakout” to the upside could occur. On the proverbial “other hand” however, weekly stochastic oscillators, which had been declining bearishly before Chairman Bernanke’s comments on Wednesday, remain so. Such a condition hints that further upside thrusts could be limited in scope in coming days and weeks. Another tempering factor is investor sentiment. According to the American Association of Individual Investors (AAII), bullish market sentiment on stocks rose to 48.9% last week, with bearish sentiment declining to 18.3%. These reading are in contrast to their long-term averages of 39.6% for those with a bullish outlook and 30.5% for those with a bearish bias and suggest that a near-term high for the S&P 500 may be in the making.
With the IMF cutting its forecast for global growth in 2013 from 3.3% to 3.1%, and with energy prices currently sitting at elevated levels (particularly for gasoline), a more sober view of economic conditions in the U.S. could also dampen near-term bullishness.
A solid break above 1,706 on the S&P 500, however, could unleash “animal spirits” again and ignite a new round of investor enthusiasm that would likely catch many investors “off sides”.
By Jim Donnelly, Olson Global Markets