It’s difficult to imagine how the S&P 500 Index can continue higher as it tests resistance from the long-term downward sloping trendline and the upper end of its recent range.
First quarter earnings reports are well underway and some widely followed issues disappointed while other notables were underwhelming. With many more on the schedule this week, unless results and forward guidance begin to improve, it’s difficult to imagine how the S&P 500 Index can continue higher as it tests resistance from the long-term downward sloping trendline and the upper end of its recent range.
US Dollar Index (DX) 95.12 up .42 points or +.44% for the week after testing support at 94 three times last week before turning higher Friday. The operative downward sloping trendline begins at the January 29 high at 99.83 touching the March 2 high at 98.58. There is considerable support in the 94-93 area, while there appears to be some resistance at 96. It would need to close above 97 to change the current trend upward. Since HFT trading seems triggered by changes in the currency market, DX remains one of the most important indicators. As long as it remains below 96, put DX at the top of the bullish column in the checklist.
iShares Transportation Average Index (IYT) 144.96 up 2.02 points or +1.41% for the week having closed back above the important long-term downward sloping trendline from the March 20, 2015 high at 162.68 as mentioned several weeks ago. Known as both a reliable leading and confirming indicator the current advance adds support to the view that the S&P 500 Index will likely continue somewhat higher. Add the transports to the bullish column.
WTI Light Sweet Crude Oil (CL) 43.73 basis June futures gained 2.02 points or +4.84% for week with a well-defined upward slopping trendline from the February 11, low at 32.10. Seasonally crude oil advances in the spring and for the last two years reached highs in June. Expect resistance at 45.
The Disaggregated Commitments of Traders – Options and Futures Combined or Commitment of Traders (COT) report from the CFTC as of April 19, released Friday shows the ?Managed Money? and ?Others? groups were buyers while ?Swaps? were sellers. Since swap dealer?s counterparties include speculative traders like hedge funds or commercial clients and others are undefined last week?s report provided no better insight than the upward sloping trendline. Add crude oil to the bullish column.
Market Breadth:?The NYSE ratio adjusted Summation Index that factors out the number of issues traded, reported by McClellan Financial Publications, gained another 147.76 points for the week closing at 1168.16 and appears headed higher. No sign of hesitation here, add another check mark in the bullish column.
Seasonally April is favorable for equities, coinciding with seasonal crude oil strength, but be aware of the Wall Street adage ?Sell in May? and go away since May is typically one of the worst months of the year. In addition to the extended advance from the February 11 low without any meaningful pullback valuation remains a valid concern. With the S&P 500 Index at 2,091.58 and S&P showing 2015 reported twelve-month trailing earnings at 86.53 or 24 times reported earnings the current valuation is considerably above the long-term historical norm of 17. However, anticipating future earnings, the bulls argue they will improve enough to justify the current valuation. Based on first quarter reports released last week any anticipated improvement may be overly optimistic. An alternative explanation might include sector rotation or sector churn when traders push up on e sector such as biotech or internet cloud until there are no more buyers. Then they rotate into sectors where there are no more sellers like crude oil, industrials and basic materials regardless of the typical market cycle since these are the sectors that usually advance in the early stages of market cycles.
In the meanwhile, as long as the majority of our indicators remain in the positive column of the checklist the S&P 500 Index will likely continue advancing until it reaches resistance from the long-term downward sloping trendline line around 2025. However, should earnings expectations diminish this week and next be prepared to implement hedging strategies once again, especially if the index makes a key reversal on high volume.