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Sentiment turned bearish a few days ago and the stock market is expected to go down as a result but the S&P 500 is resilient. It’s possible a bottom is already in place in the S&P. The US economy is not firing on all cylinders but it is not slowing down either. That is a perfect environment for stocks, this is why I think the S&P will make a new high.
Yesterday’s ISM non-manufacturing PMI came in below forecasts but still expanding at 51.4. Furthermore, the latest rally in the S&P appears to be in five waves, this would confirm the view that that US stocks are heading higher.
The correction to 2157 was in five waves (falling wedge), this pattern is bullish. So it’s not surprising to see the S&P 500 rally in the last few days. The rally is in five waves [(i),(ii),(iii),(iv),(v)], the fifth wave may have ended yesterday. As long as the previous low remains intact there is a good chance the S&P will rally in the short term as five waves up is associated with an uptrend in progress.
Factors to watch:
We now have a conflict between the S&P and the FTSE. If the S&P rallies the FTSE is unlikely to go down. Yet sentiment is bearish.
Sentiment as measured by the e-Yield sentiment indicator is bearish, this suggests the FTSE will decline. Unless sentiment turn bullish in the next few days.
The pound: manufacturing production was weak, any decline in the pound would boost the FTSE. However latest data from manufacturing PMI and services PMI was strong, the pound is more likely to rally further. This is negative for the FTSE.
Bank of England: There are some concerns the Bank of England acted too early when Mark Carney announced a new bond buying program after the referendum. If the economic data remain robust the program could be halted. This would be bearish for the FTSE.
Right now good news is bad news.
Thierry Laduguie is Trading Strategist at www.e-yield.com
