SP500 – Real or False Breakout?SP500 finished another record-setting week. The rally comes as bulls seem to be growing more comfortable with the Fed taking its foot off the gas sooner than Wall Street had been anticipating. Bulls still want to focus on booming growth expectations for the second half of the year as the pandemic recedes and economic activity accelerates.
Fundamental analysis
However, the inflation story is growing harder to look past and there are widespread expectations that analysts will begin to trim some of their lofty second quarter earnings forecasts as a result. Earnings for S&P 500 companies are currently expected to increase +60% in Q2. Lingering impacts from the pandemic that have roiled supply chains and disrupted the flow of goods don’t appear to be clearing as quickly as most had hoped, which is going to inevitably have an impact on many companies’ bottom lines.
In fact, “inflation” was mentioned by 197 of S&P 500 companies during first quarter earnings calls, the highest number in at least a decade, according to FactSet. Over the course of the past decade, U.S. inflation averaged just +1.8%, versus the Fed’s +2% target rate. Not surprisingly, Bank of England last week left its monetary policy unchanged and brushed aside fears that inflation was running out of control.
The rate-setting committee echoed statements similar to the U.S. Fed, saying they expected inflation would be “transitory” and that scaling back support too soon runs the risk of disrupting the economic recovery.
Data to watch
Next week will flip the calendar from June to July on Thursday, which also marks the end of Q2 2021. The June Employment Situation is next week’s key economic report with around +500,000 to +600,000 jobs expected to be added. The May gain of +559,000 was lower than anticipated, though March and April gains were revised upward.
Other data next week includes the S&P Case-Shiller Home Price Index and Consumer Confidence on Tuesday; ADP’s Employment Change, Chicago PMI, and Pending Home Sales on Wednesday; the ISM Manufacturing Index and Construction Spending on Thursday; and the Trade Balance and Factory Orders on Friday.
SP500 technical analysis
SP500 closed the week above the upper range of resistance. The major economic indicators are still bullish. What worries me now is Advanced Decline Line. It showed weakness last week and formed bearish divergence. Moreover, the yield curve is flattering. It is not a warning sign yet. But still, traders have to pay attention to it.
In general, if price sustains can current highs, we can see a run towards 4400. The cycles forecast a rally at the beginning of July. So, let’s see how it plays. The important supports are still MA50 on a daily chart, 4000 and 3800.
