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Push-Pull Continues

07/21/2011

The S&P 500® Index continues to trade in a directionless pattern for the month of July (Figure 1.1). The competing forces of continued robust corporate earnings and absent fiscal policy have created a "push-pull" dynamic. Pulling back further on the view highlights the sideways pattern with which the Index has traded since March 1 (Figure 1.2). On the morning of March 1, the S&P 500 opened at 1328.64, slightly above its 1325.84 close on July 20.
 
Keep in mind, although currently sideways, the S&P 500 (Figure 1.3) is still trading in the upper third of its range from September 1, 2010. Technicians view that price action as having a high probability to reaccelerate once a catalyst emerges. Three potential catalysts remain: Corporate Earnings, Fiscal Policy Resolutions, and China Growth Reacceleration. The evidence currently exists to support a continued "push-pull."
 
PUSH (Favorable conditions for S&P 500 Appreciation) 

  • Currently, 73 of S&P 500 companies have reported earnings.
  • Of the 73 reporting, 64 reported per-share profits exceeding estimates.
  • Tech heavyweights Apple (AAPL), IBM, and Google (GOOG) have provided concrete evidence that "technology spending" remains a tailwind.
  • Financials such as JP Morgan (JPM) and American Express (AXP) confirm an improving "credit quality" tailwind.

PULL (Unfavorable conditions for S&P 500 Appreciation)  

  • The European Union continues to struggle with a resolution on a response to the inevitable Greek default.
  • The absence of a resolution response fosters tremendous uncertainty for the capitalization needs of financial institutions in the event of a default.
  • The U.S. debt ceiling debate remains unresolved and it is uncomfortably close to the August 2 deadline.
  • The debt ceiling debate is the front-and-center headline for prime time networks and is having an extremely negative effect on consumer spending habits and the desire to take capital market risk.

 PUSH or PULL

  • The "hard landing vs. soft landing" China debate remains without resolution. Estimates for August 1 China PMI were revised lower to 48.9, signaling the first contraction figure since March 1, 2010.
  • The Chinese yuan (Figure 1.4) continues to appreciate. It now is trading at its highest level since 1994. Continued appreciation is a favorable condition for global growth.

Figure 1.1:  S&P 500 Index Price Action, July 2011
1356.48 High - July 7
1295.92 Low - July 18
1325.84 Close - July 20
1326.74 July Average — as of July 20
  
Figure 1.2: S&P 500 Index, February 28, 2011 to July 20, 2011

Source: Bloomberg
 
Figure 1.3:  S&P 500 Index, September 01, 2011 to July 20, 2011

Source: Bloomberg

Figure 1.4:  China Yuan, March 2005 to July 2011

Source: Bloomberg

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