Standard & Poor’s 500 Index (SPX) hit yet another all-time high level last week, the stock market however faced rejection near the channel resistance on Friday. There are at least five reasons why selling is preferred this week, let’s discuss each one by one;
30-month old upward slope channel
The stock market, on Friday, faced rejection around the channel resistance of the 30-month old upward slope. The market is likely to resume the next lag of correction from the current levels.
On the upside, decisive resistance is sitting in around 1887.00 which is the high of Friday as well as the trendline resistance. A break and daily close above 1887 could trigger the new wave of bullish momentum, exposing 1900 that is the next major milestone.
The market has entered into the overbought territory. Both the Relative Strength Index (RSI) as well as the Commodity Channel Index (CCI) are hovering above 70 and 100 respectively, which is considered a signal for overbought sentiment among traders. So technically, a correction is needed before further upside rallies.
Tight Monetary Policy
The surprise jump in the February nonfarm payrolls despite the below average temperatures across the US shows that the growth engine has been ignited in the economy. Tough the recovery and strong growth outlook is a positive sign for corporations and stock markets, but this could also prompt policymakers to consider the first hike in the benchmark interest rate sooner than previously thought. The Federal Reserve policymakers have already shown their willingness for the continuous tapering in the monthly asset purchase program until the whole stimulus package matures off by the end of October this year.
The recent tension between the West and Russia over Ukraine is also getting worsen with the passage of time. On Friday, Russia threatened the US that its planned sanctions might have grave consequences on Russia-US relations. There has been a history that the investors shun risk assets in uncertain and deteriorating geopolitical situation, particularly when the US is a stockholder in the situation.
The Federal Open Market Committee (FOMC) policymakers will gather, at the monthly monetary policy meeting, in Washington from March 18 to 19. The minutes of their last meeting showed that the central bank could strengthen its forward guidance stance through more precise explanation on the jobless rate threshold.
The central bank talks about 6.5% jobless rate target after which the policymakers could start considering hike in the cash rate. With the jobless rate hitting 6.6% in January, the FOMC policymakers now plan to offer more details on the Fed monetary policy stance if the rate falls below 6.5%. If we do not see such an explanation in March meeting, it will be very discouraging for the stock investors.
To contact the writer of this story: Usman Ahmed at email@example.com