S&P500 Continues to Climb Higher

Despite two weeks of weakening US economic data, the S&P500 continued to push higher. As of Friday’s close….at 2,905….the large cap index now stands at less than 1% below its all time highs, highs reached last fall, about seven months ago.

So without any major news or developments, the S&P500 has almost recouped its entire 20% loss, the loss that peaked at the end of December 2018.

Over these last two weeks, industrial production missed badly. Wholesale trade also missed. Factory orders shrank. Consumer and producer inflation came in hotter than expected. On the positive side, retail sales have rebounded slightly from their abysmal drop two months ago. And initial jobless claims continue to hover near 40 year lows.

At the same time, the Federal Reserve’s balance sheet continues to shrink, which is ironic because when the S&P500 was bottoming in late 2018, many experts were pointing to the Fed’s quantitative tightening as one of the leading culprits behind the market losses. But now, several months later….after the S&P has bounced massively….the Fed’s balance sheet is substantially smaller than it was in December 2018. Apparently, the impact of the Fed’s balance sheet is less than many experts had feared it was.

The technical picture for the S&P is now mixed. The weekly charts are now solidly bullish, but the daily charts are starting to show some weakness. Perhaps a modest pullback is around the corner; even a 2-4% drop would be sufficient to satisfy the weakness shown in the daily charts.

Finally, our Simple Rule is still bullish, after temporarily turning bearish a couple of months ago. That said, the fundamental components of this Simple Rule are weakening; while they’re still positive, it would not take much more weakening in US fundamentals to flip them to a bearish stance. Let’s see what the US economic data does over the next several weeks.

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