Multiple indicators point to uptrend in S&P 500

THE S&P 500 has seen a strong rally since the start of November, rebounding from a pullback close to the 4,100 level. The release of weaker-than-expected US CPI figures last week further boosted risk-on sentiment following tumbling treasury yields as traders bolstered bets that the Fed’s aggressive interest rate hiking cycle is over. The benign inflation report showed the pace of inflation moderating further in October, with month-on-month inflation flat and the year-on-year reading up 3.2 per cent, against consensus estimates of 0.1 per cent and 3.3 per cent, respectively. In addition, the market found relief in the passing of a temporary spending bill by the US House of Representatives. This bill, enjoying broad support from both Democratic and Republican lawmakers, extends government funding through mid-January, averting a government shutdown.

From a technical perspective, there are multiple bullish signals for the S&P 500. Firstly, the index has broken out of the downtrend channel and rallied above the major 4,380 horizontal resistance level in mid-October. Secondly, the index broke above the 61.8 per cent Fibonacci retracement level at 4,415, drawn using the swing high of 4,607 in July to the swing low of 4103 in October. Thirdly, several breakaway gaps were formed in the current rally which indicates strong bullish momentum and a likely continuation of the uptrend. Finally, the Moving Average Convergence Divergence technical indicator confirmed the index’s strength with a bullish crossover recently. It formed a higher high following a bullish divergence, which signalled decreasing bearish momentum, as the indicator held its recent lows in October while the S&P 500 made a lower low.

Looking ahead, the S&P 500 possesses strong bullish momentum to continue its upward trajectory after ending a three-month pullback spanning August to October. There is potential for a retest of this year’s high of 4,600. Sentiment indicators, such as the American Association of Individual Investors (AAII) investor sentiment survey and Volatility Index (VIX), also reflect bullish sentiment, creating ideal conditions for sustained equity market strength. The AAII bull-bear spread has posted its biggest weekly gain, rising from -26 to 15.4, since 2009. This implies a growing portion of investors who were previously bearish turning bullish. In addition, the VIX is currently hovering around 14, which generally corresponds to more stable and less stressful periods in the market.

The writer is research analyst at Phillip Securities