S&P500 hits a new All Time High – what’s next?

August 25, 2020 12:30

While the US economy still finds itself in a recession with the unemployment rate having hit more than 10%, millions of people being fired from service jobs due to the Coronavirus lockdown, delinquencies in the mortgage area having passed more than 8% hitting its highest levels in 9 years, US equities have reached new All Time Highs.

At first glance, it looks as if this decoupling of the Equity markets from the real economy will likely not last very long and the higher Equities rise now the more aggressive and brutal the following drop will likely be – but wait…

S&P500 at 3,800 and higher in 12 months from now?

Even though we can imagine a sharper correction to occur, especially amid the rapid growth of tech stocks, given recent developments around the FED, we imagine the recent push to new All Time Highs in the S&P500 is a very bullish sign for the upcoming 12 months – and statistics prove so.

There are two key points to consider here:

  • On Tuesday of last week, the FED mentioned something very interesting in its minutes: some FOMC members are worried about yield curve control since this could result in excessive balance sheet growth.
  • This was one potential driver for the drop in the US-Dollar and for the push higher in precious metals like Gold and Silver.
  • Moreover, this was also a driver for a rally in growth stocks.

So, we conclude that this reservation could potentially be a reason to consider long engagements in US equities.

Aside from that, the latest economic data from the US has significantly surprised on the upside with the Citi Economic Surprise Index having pushed from one All Time high to another in recent weeks and months.

Here's are some key points to take note of here:

  • This suggests that 10-year US yields are simply too low, from a purely global macro perspective.
  • Therefore, a strong move higher could be imminent.
  • Such a move and potential rotation from growth stocks back into value stocks could result in elevated volatility in Equities
  • This is something the FED will likely not allow in the current, very fragile market environment, so the US central bank may then have to act.

The moment this scenario plays out with the FED establishing such a rate cap, despite the sluggish US economic outlook, the S&P500 could start a serious rally, something which is underlined by former pushes in US Equities to new All Time Highs.

What's more, historically, from 1950 to today, whenever it has taken more than five months to make a new All Time High (as it has now, February – August), the average 12-month return for the S&P500 has been 11.4%.

How to trade [SP500] CFD in this environment?

The overall picture in the SP500 CFD remains bullish as long as we trade above the SMA(200) and above 2,950/3,000 points.

A pullback of 50% after the recent run from the move from the June lows to the August highs into the region around 3,080/100 points seems reasonable and is attractive from a risk-reward perspective, if we work with a stop loss at 2,950 points and a target at around 3,800 points, delivering a risk-reward ratio from min 150 points to 700 points or great than 1 to 4:

Source: Admiral Markets MT5 with MT5SE Add-on #AAPL CFD Daily chart (between April 11, 2019, to August 24, 2020). Accessed: August 24, 2020, at 10:00 AM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the SP500 CFD fell by -0.73%. In 2016, it increased by 9.54%. In 2017, it increased by 19.42%. In 2018, it fell by -6.24% and in 2019, it increased by 28.88%, meaning that after five years, it was up by 56.9%.

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