SPX500 Outlook on Feb 24, 2016

Earnings season is about to finish with 87% of the companies in the index reporting their Q4 earnings. According to FactSet’s estimation and forecast, S&P 500 total earnings might decline by 3.6% in the last quarter of 2015 with revenue falling by 3.7%.

The index is on track for third consecutive quarter of “profit recession”. The main reason is the strength of the dollar which has discouraged U.S. export activities. Also in the report of FactSet, companies whose 50% profits come from foreign market witnessed a general decline of 11.2% in earnings.

Under the mixed effects from oil swings and economic data, global stocks have dropped 7% since the beginning of the year. The U.S benchmark has followed the oil price closely. Yesterday, SPX500 lost nearly 1% when OPEC went back on their word about production cut, causing the oil price to fall off the peak of the week.

On Tuesday, Saudi Arabia announced that the kingdom would not cut their output in the absence of trust and commitment from non-OPEC producers. Saudi Oil Minister Ali Al-Naimi declared, “We are not banking on cuts because” there is “less than trust” that “countries are going to deliver even if they promise”.

He expected high-cost producers, referring to U.S. shale oil companies, to cut cost, or “liquidate”, which is essential to rebalance the market, because “cutting low cost production to subsidize higher cost supplies only delays an inevitable reckoning,” he added. However, he confirmed Doha accord with Russia, Qatar and Venezuela to freeze their output at 10 million barrels per day without changes.

At the same time, Oil Minister Bijan Namdar Zanganeh considered Arabia’s proposal as really “ridiculous”, when Iranian output is just a tenth of the Arabian production. Conflicts among OPEC members and with non-OPEC producers continues to weigh on the energy price in the near future.

Earlier of the day, Fed Vice Chairman Stanley Fischer expressed his positive tone about the solid of the labor market and better inflation outlook since December. Nevertheless, the possibility for another rate hike in March is almost 0% due to recent market turmoil and the oil crash. Investors predict there is a chance of 10% for Fed to increase interest rate at March Federal Open Market Committee’s meeting.

Today, EIA will publish U.S. commercial oil inventories which may put further downward pressure on the oil price.


Fig: SPX500 Daily Technical Chart

SPX500 has turned down from the peak of 1945.2, reaching to the Fibonacci 38.2% level in the last session. The index is moving above both the SMA 14 and SMA 21, suggesting a possible uptrend. Stochastic has retreated from the overbought level, indicating weaker buying power.

Trade suggestion:

Sell at 1916.0 with Stop Loss at 1922.0 and Take Profit at 1904.0

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