Tuesday saw the first decline on the S&P500 in excess of 1% this year and at the same time the steepest one in more than five months. For the first time the market thought the economic agenda of the Trump’s administration may be just a mirage. The key vote is still ahead of us, though. We present the market reasoning and the outlook for the US500.
Why are markets selling off?
The market expectations that Trump and Republicans victory in November US elections mean a game-changing fiscal stimulus are now being questioned. The first serious test if Republicans have the effective power to deliver on their campaign promises comes in the form of a vote on health care bill on Thursday. Replacing Obamacare was to be the first step in reforming the country. Republicans have a broad majority in the House. Why is there a risk of a failed vote? That’s because of a report by Congressional Budget Office showing a drastic increase in the number of the uninsured and in health insurance costs for some groups that form the core of Republicans or Trump’s electorate. One of the Republican Reps called AHCA the most "universally detested piece of legislation" he has ever seen and there were some other comments from Republican lawmakers that there is no way the bill could pass either of the chambers in this form.
When is the vote?
The vote is expected on Thursday. While there is no exact timing, we can expect a long discussion and past experiences suggest it might be late in the evening. It is possible for the vote to be delayed or canceled if the Republican leaders are uncertain of the outcome and it is even possible that the vote could be left open for several hours to provide additional time for negotiations (DeLay 2003 scenario). Even if the vote is not lost in an outright way but just delayed, markets could react in a nervous way, doubting the ability of Republican leaders to pass an ambitious economic agenda through the Congress.
What is the outlook for the US500?
Looking at the D1 time-frame for US500 (S&P500 futures-based CFD) we can see that a support around 2355 points has been broken, paving a way for a an extended profit-taking. We can see a similar breakout took place in September and led to a correction of roughly 110 points which would take the instrument to around 2290 points. A strong level of 2275 points is just below.
A similar breakout took place in September and it lead to a correction of 110 points. Source: xStation
However, from the W1 perspective a larger correction could look overdue after more than twelve months of a barely interrupted bull market. Typical corrections in the whole bull-market ranged between 8 and 22% with those deeper corrections earlier in the cycle. Therefore even a moderate 8-10% correction that would take US500 to a range between 2150 and 2200 would not necessarily herald a definitive end to this eight year bull market.
A correction of 8 to 10% would not be surprising at this stage. Source: xStation
Finally, in our Q2 trade ideas report we pointed at an interesting relationship between SPA35 and US500.
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