Technicals suggest the S&P 500 could jump 30% in a current bull market cycle that will extend to 2022, Fundstrat says

Matthew FoxOct 14, 2020, 02:04 IST

BUSINESS INSIDER

Spencer Platt/Getty Images

• The S&P 500 could surge 30% from Monday's close to 4,600 in a bull market cycle that extends into 2022, according to a technical analysis note from Fundstrat.
• The cycle backdrop for stocks remains bullish and is still improving, market breadth is expanding, and the laggards are bottoming, the note highlighted.
• "We would encourage investors to keep in mind the improving longer-term cycle backdrop underway that should support equities well into 2021," Fundstrat said.

The stock market should continue its run for at least another two years, according to a technical analysis note from Fundstrat sent to clients on Tuesday.

Specifically, monthly cycle indicators point to a continued uptrend that is supportive of the S&P 500 rising to 4,400 to 4,600, representing potential upside of 25% to 30% from Monday's close, respectively.

"Our long-term monthly quadrant balance oscillator, tracking 2-4 year market cycles, continues to build positively from oversold levels signaling the current cycle likely has room to run into 2022," Fundstrat analyst Rob Sluymer said.

The percentage of stocks in the S&P 500 with rising monthly momentum continues to rise from its COVID-19 low in March, and has plenty of upside left. This supports Fundstrat's view that a new four-year cycle bull market "is still in the early stages of developing," the note said.

On top of that, other bullish technical indicators are building a more supportive picture for stocks longer term.

Read more: Good deals in pandemic-hit companies are proving hard to find. Here's how big investors that raised billions to pounce on corporate distress are changing up their playbooks.

New cycle highs in the outperformance of the S&P 500 relative to the US Barclay's Aggregate Bond Index lead Fundstrat to continue recommending clients overweight equities relative to bonds.

And new highs in the Advance/Decline indicator shows that the rally in stocks is broadening out into other sectors with stronger market breadth. This increased participation only strengthens the current bull market.

Separate from the Fundstrat note, new highs in the Dow Jones Transportation Average last week suggest that the market will continue to surge higher, based on the more than 100-year-old Dow Theory, often followed by technical analysts.

While some short-term indicators are showing signs of becoming overbought, suggesting a pause or pullback in stocks in the coming week, Fundstrat concluded that these technical events should be seen as near-term noise, and pullbacks "as an opportunity to increase equity exposure," according to the note.

 

A surging money supply is behind MPC’s status quo

12 Oct 2020

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) let the repo rate stay at 4%. Repo rate is the rate at which RBI lends to banks. A major reason is that the money supply has risen rapidly in the last few months. Mint takes a look.

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) let the repo rate stay at 4%. Repo rate is the rate at which RBI lends to banks. A major reason is that the money supply has risen rapidly in the last few months. Mint takes a look.

What has happened to the money supply?

Money supply in the economy has increased over the months. We can look at money supply from the component side and the sources side. One of the ways of measuring money supply is M3, which is a sum of the currency with the public, the demand deposits with the banking system, which include current deposits and savings deposits, the time deposits with the banking system, such as fixed deposits, recurring deposits, and other deposits of RBI. The currency with the public has grown by more than 21% since June and so have bank deposits. This has led to M3 growing by over 12% since June.

Why are the sources of money supply?

The non-food credit growth of banks as of 25 September stood at a very slow 5.1%. This primarily reflects the reluctance of banks to lend and hesitance on part of both individuals and firms to borrow. However, the lenders seem to be happy to grant loans to the government. The government has in turn spent this money on policies such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA). It has also put money into 20 crore female Jan Dhan accounts. These efforts by the Centre have led to an overall increase in currency with the public.

Accommodative stance

Click on the image to enlarge

Are there any other reasons for rising money supply?

Foreign money continuously keeps coming into India, leading to an increase in demand for the rupee against the dollar. To prevent the rupee from appreciating, RBI sold rupees and bought dollars, adding to the increase in M3. Also, in order to drive down interest rates, RBI has pumped money into the financial system by buying bonds from institutions.

How is this linked to MPC not cutting rates?

There is too much money floating around in the financial system. Until now, this excess money has not really chased goods and services in the economy and has thus not led to higher inflation rates. A lower repo rate can lead to a further lowering of the interest rates. This can then result in some of the money chasing goods and services and thus cause higher inflation. There is also the danger of food inflation seeping into the overall inflation as has happened in the past. Note that inflation is already above MPC’s comfort zone.

Explain food inflation seeping into overall?

An IMF paper titled Food Inflation in India says: “Food inflation [feeds] quickly into… core inflation." This happened between 2009 and 2013. RBI expects food inflation to fall in the second half of the year. Nevertheless, it has no control over food inflation. What it has control over is the amount of money floating around in the financial system. By keeping the repo rate constant, it is trying to control the currency supply.

2nd Stimulus package Kudlow Says White House May Back Stimulus Package Bigger Than Democrats’ Proposal

 

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ELECTION 2020|150 views|Oct 11, 2020,10:26am EDT

Kudlow Says White House May Back Stimulus Package Bigger Than Democrats’ Proposal

Jack BrewsterForbes Staff

Business

I'm a news reporter for Forbes.

Updated Oct 11, 2020, 10:54am EDT

TOPLINE

 

As President Trump conveys conflicting messages about his support for a stimulus package, White House advisor Larry Kudlow did not do much to offer clarity on the topic during an interview Sunday, claiming the administration “may” be open to a stimulus bill with a bigger price tag than the legislation the Democrats proposed, even though congressional Republicans are highly unlikely to back such a proposal.

WASHINGTON, DC – SEPTEMBER 23: Director of the[+]

GETTY IMAGES

KEY FACTS

“He may,” Kudlow said when asked by CNN’s Jake Tapper whether the White House is “now going to try to offer a bigger deal than a $2.2 trillion proposal” offered by House Speaker Nancy Pelosi (D-Calif.) 

Hours after ending talks over a next stimulus package, accusing Democrats of “not negotiating in good faith,” Trump changed course and told House Minority Leader Kevin McCarthy (R-Calif.) he wants a “big deal,” Axios reports.  

The president then went on Rush Limbaugh’s radio show Friday and said he wants a “bigger stimulus package, frankly, than either the Democrats or Republicans are offering” even though Treasury Secretary Steve Mnuchin—who has been tasked with leading stimulus negotiations for the White House—had proposed a bill with a reported price tag of $1.8 trillion just hours earlier, an offer Pelosi swiftly rejected.

Even if Trump does settle on a price tag, Republicans are unlikely to back any bill north of $2 trillion and Senate Majority Leader Mitch McConnell (R-Ky.) said Friday a stimulus bill is “unlikely” before Election Day. 

CRUCIAL QUOTE

Kudlow said Senate Republicans will “go along with” the $1.8 trillion White House stimulus proposal, though it doesn’t appear likely Republicans will rush to get on board.

BIG NUMBER

$2.2 trillion. That’s the price tag of the stimulus bill House Democrats passed earlier this month.

 

FRI JUN 19, 2020 / 2:09 PM EDT

Running on 'hopium': Explaining the market rally in Wall Street's terms

April Joyner and Kate Duguid

  

NEW YORK (Reuters) - Risk assets such as stocks and high-yield corporate bonds have climbed over the past two-and-a-half months despite a dire global economic outlook in the wake of the novel coronavirus pandemic.

The rally has left some market observers scratching their heads but has also given rise to a bundle of jargon - some old, some new - attempting to explain recent trends. Here's a guide to what's driving financial markets now, in Wall Street's own words.

DON'T FIGHT THE FED

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One key factor in Wall Street's climb, strategists say, is the unprecedented monetary support from the Federal Reserve, including purchases of corporate bonds and exchange-traded funds. The Fed's balance sheet has expanded by some $3 trillion since March. Those actions have revived the slogan "Don't fight the Fed," as the liquidity supplied by the U.S. central bank has fueled an upward trend.

"Every time the stock market starts to sell off, the Federal Reserve responds with some accommodative policy," said Mike O'Rourke, chief market strategist at JonesTrading.

FOMO

As markets keep climbing, more people are being prodded to jump in. Retail investors unexpectedly increased their stock exposure throughout the selloff and rally, and some institutional investors are now following suit, Deutsche Bank strategists wrote earlier this month. Some market watchers chalk that up to the "fear of missing out," or FOMO, as concerns over the coronavirus pandemic begin to recede.

"We have some good news coming in now, so investors are scrambling to grab equities again," said Andre Bakhos, managing director at New Vines Capital.

FOMU

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After hitting a four-year low in March, prices of the riskiest U.S. corporate bonds have been driven higher alongside stocks by FOMU, or fear of massive underperformance, said William Zox, portfolio manager at Diamond Hill Capital Management. As the rally in risk assets took off, conservatively positioned investors may have found themselves falling behind peers. FOMU pushed them to raise their risk exposure, driving the rally further, Zox said.

TINA

The market rebound despite cratering expectations for corporate earnings has sent stock valuations soaring. The forward price-to-earnings ratio on the MSCI World index is at its highest level since June 2002, according to Barclays.

But investors haven't been put off by the notion of overvalued stocks. According to one popular line of thought, that's because "there is no alternative," or TINA. Bond yields have shrunk as central banks worldwide have slashed interest rates.

RELATED COVERAGE

• VIDEO "Hopium": Wall Street's lingo for a market rally

HOPIUM

Optimism that the U.S. economy will quickly rebound after a forced shuttering of businesses has also lifted stocks. Several sentiment indicators, including the Conference Board's consumer confidence survey, reflect an increasingly rosy view. That's led to what Liz Ann Sonders, chief investment strategist at Charles Schwab, calls "hopium."

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"I think there is a heck of a lot of hope and the assumption, to some degree, that the recovery will be pretty sharp," she said.

FOGO

Shares of several companies that cater to homebound consumers have been resilient this year. Videoconferencing company Zoom Communications Inc's (ZM.O) stock rose in March even as markets tumbled, while shares of home fitness company Peloton Interactive Inc (PTON.O) posted less than a 1% loss that month.

According to Brian Belski, chief investment strategist at BMO Capital Markets, stocks in stay-at-home categories such as internet retail and grocery delivery will likely continue to outperform given American's broad "fear of going out," or FOGO.

FILE PHOTO: A person wearing a face mask walks along Wall Street after further cases of coronavirus were confirmed in New York City, New York, U.S., March 6, 2020.

REUTERS/ANDREW KELLY

BEACH

Travel, leisure and energy companies, whose income has been decimated by the economic shutdown and restrictions on travel, have had some of the sharpest recoveries in stock and bond prices over the past few months. Shares of cruise line operator Carnival Corp (CCL.N), for instance, have rallied 136% from their April trough, after the company secured $6.25 billion in rescue financing from the market.

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Nick Maroutsos, co-head of global bonds at Janus Henderson, used the acronym BEACH, for booking agencies, energy, airlines and autos, cruise lines and hospitality - though he's not joining the buying frenzy.

RORO

The foreign exchange market has followed the rise and fall of U.S. stocks in textbook risk-on, risk-off - or RORO - fashion, according to analysts at HSBC. Before the Fed's unprecedented intervention in financial markets in March, risk-on currencies, like the Australian and New Zealand dollars, significantly depreciated against the U.S. dollar. The Aussie AUD= fell 21.6% from the start of the year to its trough on March 19.

But as the stock market has rallied, safe havens like the Japanese yen JPY= and Swiss franc CHF= have weakened significantly more versus the dollar than risk-on currencies.

(Reporting by April Joyner and Kate Duguid; additional reporting by Sujata Rao in London and Devik Jain in Bangalore; editing by Megan Davies and Leslie Adler)