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- It is important to remember, despite what some continue to say, the economy does not equate to stock markets.
- That being said, economic indicators are not running as bearish as many like to talk about while all three major US stock indexes remain bullish.
- Historically, there is a correlation to the S&P 500 gaining 7% the first quarter and what happens the rest of the calendar year. At the end of March, the S&P 500 was 7% above its December settlement.
Somehow, this past week got away from me. My preliminary schedule had me talking about US stock indexes, the economy, and the general economic cycle coming out of last weekend rather than heading into the next one. However, it works out well given Friday morning saw the release of the March US jobs data – nonfarm payroll and unemployment numbers. Before we get too carried away, keep in mind I view these numbers much like any other government number, but at least they aren’t ridiculous projections of the unknown. For the record, March nonfarm payroll grew by 236,000 jobs as compared to a pre-report estimate of 238,000 (who made the guess, I don’t know) while the US unemployment rate inched lower to 3.5% from last month’s 3.6%. The bottom line is, despite all the Chicken Little’s running around screaming the sky is falling, the US economy still seems to be running along relatively well.
Let’s now talk about stock markets, with a reminder the previous US administration was incorrect when it equated the two (economy and markets). As I’ve discussed since last November, all three major US stock indexes posted bullish reversal patterns on their long-term monthly charts last October, meaning long-term trends had turned up once again. A look back at previous discussions on the normal economic cycle shows things were a little out of line, as a turn in stock markets are generally led by a turn in bond prices. This time, though, US 30-year T-bonds (ZBM23) completed a bullish 2-month reversal pattern during November.
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Back to the US stock markets in general, the S&P 500 ($INX) in particular. This past week my friends running the Barchart Twitter page posted an interesting stat: When the S&P 500 advances by more than 7% in the first quarter, the average return for the rest of the year is 23.1% (17 times in the last 73 years). This time around the calendar, if we take the end of December settlement by the S&P 500 at 3,839.50, the March close of 4,109.31 was a 7% gain on the nose, not to mention the index posted a March high of 4,110.75 (7.1%) after climbing to 4,195.44 (9.3%) during February.
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Here's where the Twitter post gets a bit fuzzy, though. Is the projection for the S&P 500 another 23% from the March settlement or 23% total from last December’s close? If the former, then the target would be 5,054.45. If the latter, then the 2023 target is at 4,722.60. The difference is significant in more ways than just numbers, as the previous all-time high registered during January 2022 was 4,818.62. Keep in mind it was during January 2022 when the S&P 500, along with the Dow Jones Industrial Average ($DOWI), completed bearish reversal patterns that sent the indexes off in long-term downtrends. A long-term downtrend in the Nasdaq ($NASX) was also officially confirmed during January 2022.
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While I see a long-term uptrend on the S&P 500 monthly chart, that doesn’t mean the index goes straight up from here. In fact, this past week saw the June futures contract (ESM23) move into a short-term downtrend on its daily chart after completing a bearish key reversal on Tuesday, April 4. Technically, this puts the downside target area between the 33% retracement level of 4,062.03 and 67% retracement mark of 3,952.30, though the 50-day moving average is calculated at 4,068.93 as of this writing. Those of you familiar with my analysis know I’m not a big proponent of moving averages, but the reality is some algorithms use a variation of the tool for establishing positions. Heading into next week initial support is at the 4-day low of 4,096.50 with initial resistance last Tuesday’s high of 4,171.75.
The bottom line is investors are showing a changed strategy from selling rallies to buying dips. Given this, if the S&P 500 (or the other indexes) extend the recently established short-term downtrends, there should be plenty of long-term buying stepping in along the way. The ripple effect would be less investment money flowing to commodities, particularly those viewed as weather derivatives (e.g. grains and oilseeds), though that’s the subject for another day.
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- Unusual Options Activity in Citigroup Signals an Investor's Bearish Outlook
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.