The S&P 500 (.SPX) fell 14% from its November high and it’s been tumbling so far in February. If the Chinese New Year of the Fire Monkey lives up to its billing, expect an undercurrent of insecurity, significant changes, so high volatility! Should we blame it only on monkey business? Let’s look back — in the previous two Chinese Years of the Monkey in 2004 and 1992, the S&P 500 managed to eke out marginal gains in February.
Source: Thomson Reuters Eikon
Macro challenges
Oil should remain cheap in the medium-term at minimum on a deadly mix of oversupply due to political reasons and lesser demand due to a slowing global economy. Oil is fluctuating around $30/barrel. There are only two major factors able to lift the price significantly from these historical levels. The first would be a deal between Saudi Arabia, the main over-supplier, and Russia, the major collateral victim. The second would be a catastrophic loss of Saudi oil fields into the hands of ISIS. Since neither of these factors are likely, oil prices should remain heavy. Cheap oil should continue to drag down the S&P 500.
The weak non-farm payrolls for January, augmented by a string of massive layoffs at such large corporations as Macy’s, Hewlett-Packard and Yahoo, have enhanced concerns that a recession is looming.
Adversity to risk generated strong demand for U.S. treasuries, and this demand torpedoed the yield of the U.S. 10-year Treasury note.
Given the plunging stock markets in the U.S. and elsewhere, weak oil, and overall fear of renewed economic stagnation amid the Chinese economic slowdown, can the Fed really go ahead with its planned tightening of Fed funds?
Source: Thomson Reuters Eikon
Head-and-shoulders spell trouble
The January slide pushed the S&P 500 temporarily below the neckline of a long-term head-and-shoulders formation. If the index closes the month below the neckline at around 1,900, then this trend reversal pattern would signal a target of approximately 1,600 for the S&P.
Notice that despite significant selloffs in October 2014, August, September, and October 2015, and in January 2016, the S&P never closed the month below the 14.6% Fibonacci retracement of the secular uptrend. Currently, this retracement acts as resistance at 1,919. Key support is at 1,787 from the 23.6% Fibonacci retracement of the aforementioned uptrend.
Source: Thomson Reuters Eikon
Happy New Year
So, expect some monkey business for S&P 500, but don’t blame it all on the Year of the Monkey!
