S&P 500: A Market Looking For Direction:

Until last Friday, trading volume had been lighter than average for the S&P 500 companies. On Friday, volume spiked as significant selling entered the market. The S&P 500 ended the day down more than 23 points.

This is a nervous market (as are many equity markets at the moment), being propped up by global central bank monetary stimulus.

Over the weekend the Bank of China reduced reserve requirements for lenders, adding additional stimulus to a slowing Chinese economy.

• Technically, since making new highs in late February, the S&P 500 has struggled to get back to those highs and on 2 occasions, following those attempts, sold off considerably.
• At the moment, this is a market no longer able to make higher highs.
• On the other hand, the market continues to find support at higher lows.
• This narrowing consolidation is, at some point in the not too distant future, going to break out.
• The catalyst to break out to the upside (higher highs) could be earnings results which continue to come in at a "better than expected" rate.
• Thus far, with 56 of the 500 companies having reported, 77% have reported earnings higher than the mean estimate.
• Q1 earnings, originally expected to decline at a rate of 4.7% have now been revised to a decline of 4.1%.
• If this trend continues, the combination of continued central bank stimulus and better than expected earnings could be enough to generate new buying interest and drive prices to test the old highs.
• However, if a buying catalyst does not develop, markets will test the lower trend-line of the consolidation, which could escalate into greater selling if it cannot hold.
• While most of this is short-term in nature, it could have implications for the longer-term and how investor confidence will deal with what appears to be equity prices that have reasonably high valuations.
• We remain cautious about adding new money to equity markets for the time being.

http://www.highrockcapital.ca/scotts-blog.html