S&P 500 buffeted

In last week’s article titled “Headwinds increasing” we noted that the most recent leg higher in the S&P 500 had been aided by a patch of stronger than expected economic data in early April, including better than expected PMI data in both the U.S. and China.

In last week’s article titled “Headwinds increasing” we noted that the most recent leg higher in the S&P 500 had been aided by a patch of stronger than expected economic data in early April, including better than expected PMI data in both the U.S. and China.

This week, we have seen a reverse of that pattern, starting with China on Tuesday. Both the NBS and Caixin manufacturing PMI disappointed relative to expectations. Then overnight, the U.S. ISM manufacturing data also disappointed, falling 2.5pts to 52.4, its lowest reading since October 2016.

Based on respondents comments the driver behind the fall in ISM was the result of President Trumps threat to close the southern border if action isn’t taken to halt illegal immigration. While it would be fair to say the drop in the ISM may not directly be related to a sudden deterioration in economic fundaments, investor confidence can be a fragile commodity and supply chains once broken can take a long time to mend.

Finally, to this morning’s FOMC meeting, the outcome of which was mostly as expected. However, in the press conference that followed, Governor Powell repeatedly referenced the “transient” nature of low inflation. With the market’s hopes of an easing bias dented, sellers were quick to move in on the S&P 500 which finished -1.30% lower on the day.

The price action has left a rather ugly bearish engulfing candle on the daily chart, the type often viewed before meaningful turns. However, further evidence is required to confirm this is the start of a more significant pullback.

In the first instance, I would need to see a break and close below near-term support 2910, followed by a break and close below interim support 2865/55 support. Should this occur, it would project a move back to the 200-day moving average at 2770. A break/close below 2865/55 would also rule out the possibility that the current pullback is a minor Wave iv retracement, before a final push towards 3000 to complete Wave v of V.

In summary, while the combination of factors outlined above suggests headwinds to the S&P 500’s rally have increased, we remain cautious and will focus on the key support levels highlighted above.

SP 500 buffeted

Source Tradingview. The figures stated are as of the 2nd of May 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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