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    S&P 500: fresh record levels look imminent

    The major US stock indices are trading higher today, supported in part by developments outside of the world’s largest economy. News of a cease-fire in Ukraine and expectations that the Greek situation may be resolved soon have helped to support European markets, which has in turn lifted the sentiment on Wall Street. In the US, some individual stocks such as Apple, which has hit a fresh record high today, are continuing to lend support for the wider markets. But it is the on-going macro theme of current record low interest rates and expectations they will remain near historic lows even after the eventual first hike that are helping to keep investors in the stock markets. Granted, there have been reports recently that suggest funds are flowing out of the US equity markets and into Europe, where the ECB has recently announced QE. If this trend persists it may mean that the US stocks will underperform Europe, even if the US economy actually continues to outperform.

    However, with inflationary pressures being almost non-existent across many developed economies, including the US, the Federal Reserve will be in no hurry to raise interest rates. In fact, today’s US economic numbers were rather poor as both the core and headline January retail sales figures dropped more than expected while claims for unemployment benefits surged by a surprisingly large 25 thousand applications last week. Although the dollar and equities are unlikely to end their bullish runs on the back of a couple of economic indicators, the outlook may change if the trend of weaker US data continues for some time. But even if the US dollar continues to climb higher this will exert pressure on US exports and also company earnings, which would not be good news for US stocks in the long-term. But in the short-term, the weaker economic numbers may push rate hike expectations further out, which can arguably be net positive for US stocks. In any case, we expect to see only moderate further gains for US equities compared to recent times but we are still nonetheless bullish overall.

    Indeed, the near-term technical outlook remains bullish for the S&P 500. As we reported last Thursday, the major US indices turned higher on the year following a hiccup in January. The S&P in particular is looking rather constructive after it broke out of a pennant consolidation pattern to the upside last week. But as one would have expected, the index did struggle around the 2070 resistance level (previous high and 78.6% Fibonacci level) for some time before the buyers stepped in around the 2045 support level (50-day moving average and the upper side of the broken trend) on Monday which helped to push the index to a new high for the year. At 2082, the S&P is now just 11 points away from the previous record high of 2093, set in December. If and when this level is taken out then the bulls may target the Fibonacci extension levels at 2125 (127.2%) and then 2165 (161.8%). Meanwhile a potential closing break below 2070 would be a bearish development and things could get worse if the 2045 support level is also taken out. As things stand however, the technical outlook looks bullish for the reasons stated above.

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    Figure 2:

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