S&P 500 technical analysis: stimulus helps prices

The Biden administration is keen on passing a stimulus package

The S&P 500 edged lower in the third week of February. Approximately 60 per cent of the S&P 500 index companies have reported Q4 financial results. On average, more companies are beating on both the top and bottom line which has helped the large-cap index hit all-time highs. With interest rates at the lowest levels in history and additional stimulus likely from the Biden administration, prices will likely continue to rise in March. 

Seasonally, the returns on the S&P 500 index are mixed in March. The technicals point to higher prices but the S&P 500 is likely to consolidate until a stimulus package is passed.

Financial results

About 60 per cent of the S&P 500 companies have reported financial results as of mid-February 2021. The large-cap companies continue to report actual profits above estimates.

Of the 60 per cent that have reported in the S&P 500 for Q4 2020 to date,  81 per cent have reported actual EPS above estimates, which is above the five-year average of 74 per cent. If 81 per cent is the final percentage for the quarter, it will tie the mark for the second-highest percentage of S&P 500 companies reporting a positive upside surprise according to FactSet. In aggregate, companies are reporting earnings that are 15.2 per cent above the estimates, which is also above the five-year average of 6.3 per cent. 

New stimulus and low interest rates

Short-term interest rates remain at zero, and the Federal Reserve is unlikely to move any time soon. While the 10-year yield is rising, the current level of 1.3 per cent is not attractive enough to pull investors away from stocks. The Biden administration is keen on passing a $1.9trn dollar stimulus package that will help buoy spending and help to keep the upward trend in stocks intact.

S&P 500 analysis: seasonality

Historically, the S&P 500 index has experienced mixed performance returns in March. Over the past decade the index has increased 70 per cent of the time for an average gain of 0.1 per cent. During the past five years the S&P 500 index has increased 60 per cent of the time with an average loss of 1.3 per cent.

S&P 500 index technical analysis

The S&P 500 moved lower in the third week of February after hitting new all-time highs. The upward trend remains in place with support seen near the 10-week moving average near 3,805. Short-term momentum is positive as the fast stochastic generated a crossover buy signal. Prices are overbought. The current reading on the fast stochastic is 95, above the overbought trigger level of 80, which could foreshadow a correction. The relative strength index (RSI) has also diverged, unable to make a higher high, which is a sign of decelerating positive momentum. Medium-term momentum is positive but slowing as the moving average convergence divergence (MACD) histogram is printing in positive territory with a flattening trajectory which points to consolidation.

S&P 500 index: how to trade it

The S&P 500 index is trending higher, but momentum is slowing. Earnings have been very solid but the seasonals point to a mixed March. Interest rates are at historical lows and the market wants to see additional stimulus. Look for the large-cap index to consolidate during the balance of February and early March and then accelerate to higher levels.

Trade USA 500: US500 price chart

USA 500
Daily change
Low: 4583
High: 4706.6

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