Horseshoes and Hand Grenades: Levels on the S&P 500

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Horseshoe making a ringer around the peg.

Ever heard the saying that “close only counts in horseshoes and hand grenades?” It means coming close to a goal isn’t good enough for most projects.

But it can be good enough when it come to charting the S&P 500. Last week, for instance, Market Insights surveyed the market’s backdrop of resistance around 2860 and support around 2800. Our post asked the simple question of whether the weak geopolitical backdrop would cause a retest of that key support zone.

The S&P 500 proceeded to drop more than 1 percent this morning, its biggest one-day decline since June 25. At its low, the index touched 2802.5, just 2.5 points from the level recently highlighted. That could be close enough.

After all, the domestic picture remains strong. Not only did July’s retail sales total beat estimates today. Two other reports may suggest the U.S. economic expansion still has room to run. The New York Federal Reserve’s Empire Manufacturing Index, for instance, showed it’s taking factories longer to fill orders and shipments are rising. That could mean business is still on the upswing.

S&P 500 with key levels and 30-day moving average.

Secondly, second-quarter labor productivity rose more than expected amid a surge in output. That’s important because many economists had worried the U.S. wouldn’t be able to keep up with demand. What if those same professional bean counters are simply too pessimistic about weak “trend growth” for our country?

Things are obviously worse abroad. Turkey’s in a currency crisis and China’s clearly slowing. That’s weighed on oil prices, pretty much along the lines Market Insights described two weeks ago. Other commodities have followed suit.

But Europe isn’t dead yet and Japan seems to be rousing from its long economic winter. Second-quarter gross domestic product beat estimates in both regions, and this week’s Zew economic survey showed surprisingly strong conditions in Germany. Don’t forget the euro hit a new 52-week low today, which will likely trickle through to stronger exports in coming months — regardless of trade wars.

(The next question to ask is whether Jerome Powell’s Fed shifts to a regime of three rates hikes this year instead of four. It’s hard to see how that would be bearish.)

Finally, don’t forget we just ended a very strong earnings season. Almost 79 percent of companies surpassed profit estimates and 73 percent beat on revenue, according to Thomson Reuters. That’s well above the long-term average on both.

In conclusion, the S&P 500 seems to be holding a key level as we enter a quiet period at the end of the summer. This isn’t a trade recommendation and everyone needs to do their own homework, but a lot of positive conditions seem to remain in effect despite the past week’s turmoil.

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