Here’s four things besides the U.S. earnings season lowered expectations to consider:
- Japan’s upcoming QE (aka Helicopter Money)
- UK’s upcoming Interest Rate Cut
- China’s a) trade figures & b) Hague decision over South China Sea
- Russell 2000
These four items are, essentially, the big drivers of this bullish breakout of a 2 year trading zone on the S&P 500. Oil we all know took a licking from this point last year into February, and what we’re seeing with oil having these positive days like yesterday where it was up $2 have a direct impact on those companies. All of them are likely to beat expectations when they report this month.
However, the other factors are significant as well.
1. Japan’s election this week which created an Abe friendly cabinet is more than likely to see some 2Trillin Yen flow of Helicopter money into the economy which will stabilize the USD/JPY fluctuations. Ben Bernake was in Japan yesterday so, when the cabinet meets at the end of the month, it’s likely they are going to come out with a plan to begin fuelling up the QEcopters.
2. BREXIT created a storm of political moves which, under regular circumstances, would have collapsed almost any economy in the first world. Instead, the FTSE was the first of the markets to recover and go green after the BREXIT vote, PM Cameron’s stepping down, along with those who fought for BREXIT, gets a fresh face today with PM May. The Bank of England meets tomorrow and a .25% rate cut is on the table and expected to be applied which would be another form of QE Helicopter money.
3. China trade data was due out late last night and was delayed while the Chinese focus on making it well known that they are not willing to accept the decision from the Hague regarding the dispute over the South China Sea. The shipping lane is one of the busiest and the infrastructure they have already spent years on developing clearly backs their stance which will likely be fuelled when some childish remarks come from the newly elected president of the Philippines: Rodrigo Duterte.
The Chinese Trade Data Results:
China Imports YoY
Actual: -8.4% Forecast: -5.0% Previous: -0.4%
China Exports YoY
Actual: -4.8% Forecast: -4.1% Previous: -4.1%
China Trade Balance (USD)
Actual: 48.11B Forecast: 46.64B Previous: 49.98B
Russell 2000 ETF: IWM
4. The Russell 2000, IWM, has been a key factor in the markets resurgence over the past few months and is on the cusp of breaking out. With a similar Inverse H&S set up like what SPY is in from the Pre-BREXIT highs, the smaller cap companies have been injected with enough juice that, from 119.72 where it closed on Tuesday, has upside to 126.74, the 52Wk Hi, to close out its bigger picture Inverse H&S.
From a rational point of view, we can argue til we’re blue in the face along with every market commentator that this is an unloved rally, it’s overbought and needs a breather. All are TRUE, but until there is a bit of data to throw some reality into last week’s painted JOBS report, the action remains bullish and refuses to take a knee. Add in that Bond Yields are at lows and interest rates on cash are crap, you have a powder keg being filled with more and more gun powder begging for a pullback.
Since Friday’s response to the June JOBS report, SPY reclaimed the pre-BREXIT high, surpassed it to the YTD High, set a new high at 213.20, another at 214.07, another at 214.58, another at 214.94, then finally peaked yesterday at 215.30. Note that on each and every one of these moves upward from one point to the next, it took a period which the price action consolidated at each level, fuelled with a couple of gap ups, and is now using the previous, 214.94, as support.
Each of these will now be a support line as the expected pullback into the 210-211 and subsequent 208-209 range weighs on the screen of those who are looking for this pullback to occur. The Daily Chart has yet to break down below the trend line created from the post-BREXIT lows, yet the full stochastics are EXTREMELY overextended since July 1. What could be the “saving grace” for this to finally be the breaking point (besides some expected bad news from China’s data this week) is the correlation between the VIX and SPY.
Over the last two trading sessions, VIX Futures have continued to trade positive while SPY has continued to create newer highs. The CBOE has VIX data going back to 1990 which, using some data from a previous study a few years ago, showed that VIX and the S&P 500 moved higher together for two consecutive days 82 times. Of those occurrences, about half of the time (50%) the market dropped over the next 1 to 5 days whereby the drop typically outweighed the moves higher.
The data might not be the Holy Grail or Magic 8-Ball answer many are looking for, but the previous results is a rare indicator that is slightly bearish and that Chinese trade data was far from encouraging they will produce GDP numbers this Friday equal to or greater than the projected 6.6%.
SPY Pivot Points
Pivot Point : 214.56
R = Resistance
S = Support
It’s considered that when R1 has broken, the pattern is bullish. When S1 is broken, the pattern is bearish.