S&P 500 will struggle to break 2100

By Colin Twiggs
April 7, 2016 6:00 p.m. AEST (4:00 a.m. EDT)

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The S&P 500 is headed for a test of resistance at 2100, buoyed by indications that the Fed will not raise interest rates for at least two months. 13-week Twiggs Momentum lifted its nose above the zero line. Not quite a recovery but an improvement on its recent performance. Reversal below 2000, however, would warn of another test of primary support at 1820 to 1870.

S&P 500 Index

CBOE Volatility Index (VIX) at 14 indicates that (short-term) market risk has eased.

S&P 500 VIX

So why the skepticism? To give a balanced view I will start with the positives.


Construction spending is on a tear.

Construction Spending

Consumer sentiment is OK.

Consumer Sentiment

ISM Manufacturing PMI Composite recovered above 50, indicating expansion, after its recent scare.

PMI Composite

GDP growth is low but expected to hold above 2.5% per year. Here I estimate total weekly earnings of nonfarm employees (blue line) to project the likely path of GDP growth.

GDP and Nonfarm Payroll ($)

And retail sales growth (ex Autos) is at least matching core inflation after its recent contraction (in real terms).

Retail Sales ex Autos


All looks rosy so far, but light vehicle sales — a useful indicator of longer-term consumer confidence — are falling.

Light Vehicle Sales

Business sales growth turned up in January but is still below zero.

Business Sales

The yield curve is flattening. Illustrated here by the differential between 10-Year and 3-month Treasury yields. If this gets near zero, banks stop lending and a recession (gray bars) soon follows.

Yield Differential

You can already see currency growth, measured in real terms after deducting core CPI, starting to fall.

Yield Differential

Surely the all-powerful Fed will step in and fix this. Based on past performance, it is likely to register as "Collateral Damage".


I think we are in for a tough earnings season. Profit margins to the fourth quarter of last year were down 20 percent year-on-year. Note the relationship between this level and past recessions (gray bars).

Profit Margins

Some activity indicators like electric power generation have recorded nasty falls. That cannot be simply ascribed to an increase in solar panels.

Electric Power Generation

Pressure on the banks is also rising, with the flattening yield curve compressing interest margins. When margins narrow, the risk-reward payoff gets skewered and banks are reluctant to lend, precipitating a contraction.

Net Interest Margins

Well, the earnings season is upon us and will soon either confirm or disprove my bearish view of the market.

A wise man proportions his belief to the evidence.

~ David Hume (1711-1776)


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