Overall, U.S. economic activity remains positive. The primary debate among investors centers around a possible U.S. decoupling and positive U.S. equity market performance as a result. I remain very cautious and admonish against piling bullish bets in the S&P 500.
Retail investors are buying into the decoupling theory. Why wouldn’t they? U.S. economic reports have been improving; I just read in the Miami Herald that the job crisis has turned a corner. Manufacturing is also picking up steam and confidence is on the rise. However, institutional investors remain mostly cautious as do I.
The Eurozone sovereign debt crisis remains a poisonous thorn for the S&P 500. Italian, Spanish, and French 10-yr yields widened substantially in the past week and the downward trend in the Euro persists. Furthermore, it’s not only the Eurozone that continues to exhibit weakness. China continues to disappoint and officials remain resistant towards loosening monetary policy. Premier Wen actually stated that China is in a stagflationary scenario. Home prices are falling and the country’s communist party is finding itself between a rock and hard spot . Remember, almost half of S&P500 profits originate from abroad. Weakness in these two important economic blocs will negatively affect profit trends for multi-nationals. While the U.S. economy may remain resilient, that doesn’t necessarily mean that profit trends for these companies will follow suit.
From a technical standpoint, U.S. equity markets are at a pivotal technical test. On the bullish end, many markets are actually above their 200-day moving averages. However, price action seems “heavy.” A bearish hue is building. Along with almost little to no wall of worry among retail investors, other important markets haven’t been as ebullient, such as copper and US Treasury yields. Copper remains in a triangle consolidation pattern and is looking to break out very soon. If it breaks to the upside, then the bulls will have an important arrow in their quiver and vice-versa. Meanwhile, U.S. Treasury yields, such as the sub 2% 10-yr, can’t seem to signal an all clear. These are clear bearish divergences that cannot be ignored.
Which asset classes are correct, U.S. equities, or Copper and U.S. Treasuries? Typically it has been the latter ones. I feel that a resolution is forthcoming very soon.
S&P 500 Levels I’m watching: Resistance –> 1,285 and 1,300; Support: 1,267/1,250 and 1,220-1,225