S&P to jump by 24%…

RoboStreet – February 15, 2018

Rally Back to the 50-day Moving Average Raises Caution Flag

U.S. equities advanced for a fifth consecutive session yesterday, overcoming a hotter-than-expected January CPI reading. The Nasdaq Composite led the rally, followed by the S&P 500 and the Dow Jones Industrial Average, both of which returned to positive territory for the year. The Russell 2000 also gained on the week is still down year-to-date by about 0.5%.

The market showed an impressive performance following the release of the Consumer Price Index for January, which prompted fears that inflation is picking up: total CPI increased 0.5% month over month versus consensus +0.4%, while core CPI, which excludes food and energy, rose 0.3% versus consensus +0.2%.

The headline on CPI initially pushed the Dow down over 250 points, but the market bounced back after investors had time to further digest the report, which, on a year-over-year basis, wasn’t all that alarming: total CPI and core CPI are up 2.1% and 1.8% year over year, respectively, which is in line with where they’ve been for months.

Cyclical sectors like financials, technology, consumer discretionary, industrials and materials have led the charge all week, indicating that investors grew more comfortable with the inflation data, which is ultimately consistent with a growing economy and increased corporate earnings. The countercyclical health care space also outperformed, but the consumer staples, utilities, telecom services, and real estate groups lagged.

In the bond market, U.S. Treasuries were weak ahead of the release of Wednesday’s economic data–which also included a disappointing Retail Sales report for January (-0.3% actual vs +0.2% consensus) and extended their losses in the aftermath, pushing yields higher across the curve. The benchmark 10-yr yield climbed eight basis points to 2.91%, which marks its highest level in more than four years.

Meanwhile, the U.S. Dollar Index declined 0.8% to 88.88 as the greenback gave up ground against the euro (1.2459), the British pound (1.4007), and the Japanese yen (106.97). The dollar/yen pair fell 0.8%, hitting its lowest level since November 2016. Dollar weakness helped commodities, including crude oil; West Texas Intermediate crude futures climbed 2.3% to $60.57 per barrel. On a related note, the Department of Energy reported that U.S. crude inventories rose by 1.8 million barrels last week, which was roughly in line with estimates.

Looking ahead, investors will be watching the 10-yr Treasury for whether a move up through 3.0% yield will provide a stiff headwind to equities. As of yesterday, the S&P 500 ran into its first overhead test of resistance at 2,720 (50-day moving average) where it was met with some profit taking. The S&P has recovered 60% of its correction-related losses in what can only be described as a very impressive rally off the reaction low of 2,533.

Once the market consolidates this mighty bounce off the lows, the forward picture for the S&P looks bright as per my AI model. Today’s six-month forward forecast has the SPDR S&P 500 challenging $338 by July. This implied,  would move the S&P 500 index trading at 3,380 or 24% higher than where the index trades today.

My system is currently assigning a Probability Reading of 75% of this forecasted massively bullish move materializing, which would catch I think nearly every investor by surprise. Here is today’s 6-month forward read:

While the media may spin fear of a deep correction just around the corner so as to keep investors glued to cable business channels, my AI model tells quite a different story, one of where the market will likely take a brief rest and then trade firmly higher. It’s a classic case of where how the market can even outsmart the savviest of professionals that aren’t utilizing the power of machine learning to their advantage. Fortunately, our always learning systems removes the emotional aspect of the past three weeks, and what we find is the bull trend to be very much in tact with blue skies ahead.