The Fate of the S&P Hangs in the Balance — and These 3 Factors Should Decide It

The “slower summer season” is nearly upon us. For investors, that means if this market isn’t crashing, then it’s bullish.

So says Cracked Market blogger Jani Ziedins, who thinks the path of least resistance for equities remains an upward one, largely because (a.) scary trade headlines don’t have the bite they did months ago and (b.) the sell-the-news crowd largely bailed out weeks ago. (A reboot on that war of words between North Korea and the U.S. ahead of the an on-again, off-again summit may be another matter.)

While Ziedins seems fairly at ease about this stock market’s direction, and futures have an air of summertime laze about them, you might want to sit near the lifeguard based on our call of the day.

It comes from Canaccord strategists Martin Roberge and Guillaume Arseneau, who say the S&P 500 has been following a “correction road map” since the 10% February pullback, but now faces a fork in the road that will be decided by the performance of three big assets.

They see the S&P headed for some choppy waters over the next few weeks before that definitive move higher or lower, which is laid out in this chart:

 

They mark out two diverging directions for stocks based on Fed tightening scenarios. The green line indicates a bullish scenario for equities, predicated on Powell and the Fed gang managing a so-called soft landing — interest rates rise enough to keep inflation under control and not trigger a recession. The blue line shows a “hard landing” scenario — rate hikes trigger a recession and equities pull back.

Canaccord analysts are betting investors will get path No. 1, but aren’t turning their backs on a hard landing. They say a combination of three things — 10-year bond yields above 3.25%, oil prices atop $75 a barrel and the ICE Dollar Index above 95 — would trigger a recession and hence a slide for stocks.

“This does not mean that stock markets would peak right away. Nevertheless, we believe equities would become a higher-risk proposition,” say Roberge and Arseneau.

For now, they have no worries about bonds or a bigger dollar blowout, but are keeping an eye on the oil-price “wildcard.”

The market

The Dow DJIA, S&P SPX and Nasdaq COMP all opened a shade lower on Wednesday.

The dollar DXY  is down, and the Turkish lira USDTRY, +4.6130%  is back under pressure after yesterday’s central-bank move that’s clearly not working. Crude oil US:CLM8  is down and gold GCM8 is up.

Asia ADOW had a bumpy session, while European stocks SXXP are moving up as Italy fears ease.

The buzz

Auto stocks in Asia and Europe took a knock from reports Trump is considering new tariffs on cars and car-part imports.

And no rest elsewhere on the geopolitical front, after North Korea’s senior envoy for U.S. affairs called Vice President Mike Pence a “political dummy” and suggested a “nuclear-to-nuclear showdown” if the June summit with the U.S. doesn’t go ahead. Meanwhile, North Korea says it has destroyed its Punggye-ri nuclear test site, with journalists present.

Apple AAPL is reportedly teaming up with Volkswagen VOW3 VLKAY to modify VW vans into self-driving shuttles for its workers. That’s after BMW BMW and Daimler rejected Apple’s partnership ideas.

Deutsche Bank DBK, DBK is down as a shareholder meeting turned ugly for Chairman Paul Achleitner, with calls for him to step down. The German bank says it’ll cut more than 7,000 jobs.

Keep an eye on GE GE this morning after CEO John Flannery, speaking at a conference, triggered a meltdown for shares.

The Department of Justice has reportedly opened a criminal probe into whether traders are manipulating bitcoin BTCUSD prices, which have clearly seen better days.

Weekly jobless claims and existing home sales are the key data today. New York Fed President William Dudley spoke in London early, but didn’t touch on monetary policy, and Philly Fed President Patrick Harker is on the docket too.

Think you can time this market? Here’s a game that will prove your level of genius (or not). (h/t Crossing Wall Street’s Eddy Elfenbein)

The chart

The Nasdaq led yesterday’s gains, with a standout performance by star player Netflix NFLX, whose nearly 4% pop was its best one-day gain since mid-April. That got the attention of Michael Kramer, founder of Mott Capital, who called it a “breakout of epic proportions.”

Here’s his chart:

 

“The breakout came on strong volume, which is a bullish indication. Additionally, the relative strength index also broke out, crossing above a downtrend, another bullish signal,” Kramer explains in an email to MarketWatch.

And he thinks this is bullish for stocks overall. “Netflix has been the leader all year long, and the soldiers will follow the generals, and there is no doubting Netflix’s leadership this year,” he adds in the blog.

The stat

$200 million — That’s how much a Goldman Sachs GS unit made in a single session in February, after the Cboe Volatility Index VIX logged its biggest one-day move on record.

The bank’s derivatives unit raked in that huge profit after making a bullish bet on volatility as the VIX surged 116% on Feb. 5. The profit that session was more than the division typically makes in an entire year, reports CNBC, citing sources.

Article and media were originally published by Barbara Kollmeyer at marketwatch.com