After a month-long rally, the S&P 500 index which the C Fund tracks has been in a flat rangebound pattern over the past week. This major index is still about 10% below its all-time highs from September 2018, and there are a few obstacles in its way upward as we move further into 2019.
Fundamentals like earnings-per-share, debt levels, and economic strength drive stock market prices in the long-term. But in the short-term, most trading is governed by emotional humans and trading algorithms, and they frequently pay attention to what charts look like.
When the market had a sudden drop in December, it crashed down through a significant support level that it had bounced off from twice before. A support level is like a psychological line in the sand that tends to hold up a bit better than other arbitrary price levels due to the behavior of human and robot traders. Support levels are built from past chart behavior. When support levels are broken through on the way down, they frequently become resistance levels on the way up, meaning that it takes a little bit of extra bullish momentum to get back above them.
Over this past week, the S&P 500 has been testing this first level of resistance (which was previously support) with flat and choppy performance, and if it convincingly breaks up through that, there’s a second level of resistance about 5% higher from here on our way towards recovering to the previous market high.
Bullish Catalysts Towards New Highs
There are a lot of fundamental forces holding stocks down at the moment. The ratio of U.S. net worth to income is already at record highs due to high asset prices across the board. Corporate debt as a percentage of GDP is also at all-time highs. The Federal Reserve is gradually shrinking its balance sheet, which reduces liquidity in the economy and puts mild downward pressure on asset prices.
There are, however, a few potential catalysts that could move the market higher before this long business cycle comes to an end.
Surprisingly Good Earnings – Corporations are in the middle of earnings season right now, meaning they are reporting their results from the past quarter. The big ones this week are Apple, Microsoft, Facebook, and Caterpillar. The big tech companies are important because they are some of the largest companies in the S&P 500, so if they have a big stock price change due to earnings announcements, it has a disproportionate effect on the index. Caterpillar is important because as a huge maker of construction equipment it’s a widely-viewed bellwether of economic strength in various places of the world and can affect broad investor sentiment. (Caterpillar fell nearly 10% and dragged down indices today after missing earnings targets and issuing weaker guidance, in part due to a slowdown in China.)
China Trade Deal – There is a lot of uncertainty in the business community about trade relations between China and the United States, including tariff impacts. Besides the impact on Chinese companies, U.S. companies that sell products to China face a significant risk as well as U.S. companies that make products in China and ship them back here.
In addition, many U.S. technology companies are concerned about what are widely viewed as unfair intellectual property practices in China. An announcement of a constructive trade agreement in the coming months between the United States and China would likely be seen as a strong positive factor by the market.
Shutdown Resolution – The longest government shutdown on record has come to a close, but only for a few weeks. Political leaders are now working on a more permanent solution for the rest of the year. A constructive agreement that funds government agencies through the rest of the year could be seen as another strong positive by the market.
Strong earnings reported from significant companies, progress on a trade deal with China and a solution to border funding would bolster the market – however, none are certainties and we could just as likely be in for more turbulence.