Editorial Contributor
S&P 500 It is hard not to be impressed by the S&P’s performance in 2013 so far. The world’s most important stock market recently hit a new all-time high of 1597, up 14 per cent on where it was at the start of 2013. This does not seem wholly justified given the fundamentals. The US economy and many big corporations are showing signs of slowing growth, while Wall Street is hardly cheap. At 1554, the S&P trades on around 22 times its average earnings for the last ten years, which is certainly high by past standards.
CHART - S&P 500 What is driving the S&P upwards despite the dodgy outlook is cheap money? Since late 2008, US stocks have tended to surge when the Federal Reserve has been pumping money into the system, and have retreated whenever it has stopped doing so. A market where price gains are powered by investors buying in expectation of further increases based on monetary manipulation is clearly at risk of becoming a bubble. For as long as the Fed is pumping liquidity into the system, i would be seeking long positions in the S&P. A cluster of interesting targets exist up at around 1674. Rallies from around the 13-day exponential moving average make obvious entry-points. I would begin to get nervous about a major market sell-off once the 10-year earnings multiple gets above 25, and extremely nervous once the Fed starts withdrawing stimulus.
50 | www.financial-spread-betting.com | May 2013