The last day of January turned out to be quite optimistic as the S&P 500 broad market index and the Dow Jones continued to post gains above their 200-day moving average. Both indexes rose above this important benchmark level adding 1.8% and 1.3% respectively on Monday.
Both indexes continue to gain on Tuesday. But it is important that investors are not fooled by this rebound and do not obtain a carefree attitude as downside factors that could send stock markets spiraling down are still on the table. Plus, the Federal Reserve (Fed) is expected to end its $30 billion stimulus package and to start its interest rate’s hikes cycle - and the market is expected to face this monetary tightening very soon.
So, it is important not to be lulled by the market’s endearing music, even if the new highs of the S&P 500 may convince investors otherwise. You may use these buy opportunities to open buy positions before March, but it should be a short-term operation.
For the moment, the S&P 500 index returned to the upside track with the target for the end of the week at 4600-4650 points. This upward move is likely to be supported by the Q4 corporate reports as more than 79% of S&P 500 listed companies that have already delivered their earnings reports have beaten analysts’ expectations. This week more than 100 U.S. companies will be reporting with Amazon, Facebook (Meta), and Google (Alphabet) playing a central role. Last week Apple delivered its outstanding Q4 financial results making investors believe that other FAANG (Facebook, Amazon, Apple, Netflix and Google) companies will also present excellent reports .
On the other hand, macroeconomic events this week may cause the stock market to move into a more negative territory as the Bank of England (BoE) is likely to hike its interest rates from 0.25% to 0.5%. The most intriguing event is likely to be that of the European Central Bank’s (ECB) meeting. The ECB clearly needs to follow the monetary tightening vector set by the Fed, but it probably does not have the right ammunition to shoot with as the European economy is in a worse condition than in the United States. Thus, the ECB may perform much less tightening than the Fed.
January Non-Farm Payrolls may show that 155,000-199,000 new jobs were created last month. This may sound positive for the stock market, as it may lower the Fed’s tightening angle. On the other hand, some investors may consider actual job data as not being enough for U.S. business to grow. This would mean the lower the Non-Farm Payrolls the more earnings growth will boost inflation, causing the Fed to react aggressively.
Macroeconomic stories are scheduled for the end of the week, so investors may choose to focus beforehand on the stock market rebound. The first entry point for opening buy positions appeared on Monday, while the next one may appear on Tuesday if the index ends the day in positive territory.
Brent crude prices are likely to rebound from $90.00-91.00 per barrel as strong resistance is seen within this zone. Fundamentally, such high oil prices are not justified as the macroeconomic situation suggests they should fall sharply in the near future. An OPEC+ meeting this week could be the perfect reason for such a decline if the group announces a scheduled 400,000 barrel oil production increase. Traders should also consider possible interventions from China in the commodity market, and geopolitical tensions between Russia and Ukraine. The Winter Olympics that will begin in Beijing on February 4th could also play a geopolitical role for the markets. So, there are too many factors that are currently affects markets. With this in mind it is better to avoid large operations in the crude market.
Gold prices tumbled to $1800 per troy ounce and are continuing to hold at this level. The nearest support level is at $1750 per ounce. Gold prices are currently on the upward track that should last by the end of February. This makes the current situation in gold rather uncertain. So, it would be better to avoid any trades in this market too until the situation is more clear.
EURUSD closed last week below 1.12300 creating a downside pattern with targets at the 1.09500-1.10500 area. This decline is hardly comparable with the stock market performance but may mean a large fall of the Euro after the ECB meeting this week. Sell operations are seen likely to be opened between 1.12700 and 1.13200.
The GBPUSD situation is even more complicated than the Euro. The Cable is likely to dive deeper after passing the 1.35000 level with targets at 1.32000-1.33000. But this technical scenario is not in line with a possible interest rate hike by the BoE this Thursday. So, it is better to close any sell trades before the BoE’s decision.