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Thoughts from the Trading Floor 26th March

From a technical perspective, short term bulls remain favoured. The S&P 500 is trading within touching distance of this year’s high prints of 1408.00. Given the nature of the rally that has led the market to this point we may see the market hold in around the 1380.00-1400.0 area for the time being until it can establish a base before another sharp push higher, potentially on the 1st day of the month. The market has seen a recent low print put in at 1380.00, and thus bulls would favour this to be a low for the consolidation point before another drive higher. If bears are to make any headway in the coming weeks, they would need to see the 1350.00 handle give first.

The equity markets have seen choppy trade over the last week and for the first time this year we have seen deeper corrections in the European markets, which we had lacked for much of this year. The corrective action does not seem to be over just yet, and we would back the recent correction to extend into this week for the end of month. However this correction may appear as a choppy range for the markets as opposed to a deeper dip lower. Thereafter we may see the next leg higher for equities on the first two days of April. This had been the type of steady bullish behaviour that we had observed during the latter half of 2010; the last time we saw this type of bull market.

Interestingly, we have seen somewhat of a disconnect between risk markets in the last week. US equity markets have largely been sideways always liable to spring back and recover any losses occurred during the morning sessions, whereas Europe has come under steady downward pressure. This has coincided with an easing in peripheral bonds with Italian and Spanish bond yields rising in sympathy with risk off price action. Over the last 2 years Europe has been a leader in turn of risk sentiment and therefore the developments in these markets is interesting. If we can continue to see sustained risk off action in European markets, it opens up an asymmetric shorting opportunity for US equities as they remain near recent highs and therefore one can have a tight risk on short trades with the opportunity of seeing US equities catch up with Europe if the risk off price action continues to develop.