Analysis | May 13, 2021

Outlook and forecast: SP500

The SP500 has been a big bull market but we are seeing some weakness this week. We had stronger than expected CPI inflation data from the US yesterday and bondyields rose and stocks corrected to the downside. Below our view of the fundamentals, sentiment and technical levels in terms of the SP500.

In terms of inflation yesterday Consumer prices were up by 4.2% in the 12 months through to April, up from 2.6% in March, this was the biggest increase since September 2008. This send Bond yields up and stocks down, as investors ponder whether the Fed will be forced to raise interest rates – To read more about our view on the direction of bonds and the USD Click Here to view Yesterdays Post

Sentiment Bullish Extreme

Stock markets are at bubble levels and Goldman Sachs Noted a few days ago: “Max length, max valuation, max issuance and seasonal headwinds…what could go wrong?! Gross leverage reached a new all-time high. Longs/Short ratio 91%-ile 5Y.  Third largest weekly risk-on flows on GS PB records and largest since first week of Feb 2021. All regions and sectors saw risk-on flow.” We have a bullish extreme in stocks  and the Inflation data yesterday was the trigger fro some selling but we could see more corrective action coming due to the huge amount of speculators and large funds who are heavily long…

We are already below the 4078 level and its an important one to watch: “S&P 4078 is the threshold where systematic momentum turns negative. No meaningful supply in the immediate term but $23B of S&P would be sold over the next 1 month if the market stays below this trigger. Just a friendly reminder that CTAs are close to max long….” (The Market Ear)

Technical Analysis

While we have seen some weakness on the chart below we need to take out the 4.000 level in our view to turn the trend bearish. If we broke lower we would expect a run down to major support levels indicated. Rallies should be held by resistance indicated and the 20 day Moving Average.

 Keep In Mind Valuations

 Two charts below one from Goldman Sachs and another showing Warren Buffets favourite indicator – we have the biggest bubble in history. At some point we will see a big correction the market has been very resilient and the majority don’t see a big fall in the SP500 BUT its worth being alert for one due to the expected payout against risk is highly favourable.

 

 

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