Enthusiasm continues to dominate in U.S. stock markets, as the S&P 500 presses forward to its prior highs. Many long investors have started to wonder about whether or not it is actually possible for stock market instruments like the SPDR 500 Trust ETF (SPY, Financial) to continue rallying higher.
Of course, there are legitimate concerns that support the bearish outlook for stock markets as a whole. The S&P 500 is currently valued at 19 times forward-earnings and this does come roughly in line with the upper range of the benchmark’s long-term historical averages.
At the same time, the U.S. Federal Reserve is on a clear path toward raising interest rates in ways that many of argued will choke economic growth in the quarters ahead. This could make it difficult for companies to surpass the analyst expectations for corporate earnings. Key tech names like Netflix (NFLX, Financial) and Facebook (FB, Financial) have already posted substantial misses in their most recent reports, and this has only served to elevate investor concerns that a major to in the S&P 500 could be rearing its head sometime soon.
But when we are looking at these macro factors which truly influence corporate earnings, the most critical area to watch can be found in the overall health of the household consumer. If consumer spending levels are not inhibited by higher inflation levels or tighter interest rate policy, there is little reason to believe that corporate earnings will suffer in a material way.
Companies like Amazon (AMZN, Financial) have already gone far to prove these points with their latest economic report, which essentially shows that consumers have found viable cost alternatives as a means for combating higher inflation levels. These trends relate closely to the Law of Scarcity, which is a topic fully explained on Discuss Economics in one of my prior articles. For investors, it will be critical to continue monitoring consumer economic trends as this could be the key to determining the next direction in the S&P 500 (and the other central stock benchmarks).
Since we continue to trade at elevated price levels, I have started to track potential support levels in the SPY ETF which could continue to contain prices over the next two to three months. To the downside, I am currently watching 278.86, which is the low from July 11 as well as 270.90 (the low from July 3). Additionally, we must remember that the 200-day moving average is used by many large proprietary funds as a trigger for new “buy” and “sell” signals, so it will be important to monitor the price behavior in the ETF as it approaches these levels in the weeks ahead.
Disclosure: Author is long SPY through long-dated options.
