Markets have reached an interesting point. The underlying fundamental data, because of the seemingly permanent low interest rates, still suggests stocks are cheap relative to bonds. But the technical data shows stocks in a more tenuous position, looking over-bought while simultaneously showing signs of declining volatility.
The big question mark seems to be inflation. Is it permanent or transitory? The mainstream narrative is that it’s transitory.
If the mainstream is correct, this market should continue to grind higher as the already strong economy continues to improve with improving supply chains. This should relieve some of the demand shortage and improve pricing.
On the flip side, wages are already higher and continue to rise. Unofficially, it appears the extended unemployment benefits have driven some of this labor shortage. Those benefits are supposed to be sunsetting. However, historically, wages are one of the few things that don’t re-set lower once they rise. So it remains to be seen if this wage inflation is transitory. And if it isn’t, will it lead to more permanent adjustments to market prices?
While the analysts sort this out, the markets have continued voting with higher prices. Last week, despite technical headwinds, the SPX managed to finish the week with another all-time high. This seems to be the trend, with the week starting out cautiously, but ending with more buyers.
Looking at the technical set-up, the markets continue to appear over-bought, but there is nothing that suggests the markets have figured this out yet. So things appear to be grinding higher until something initiates a change.
For the week, it appears the 4450 level is in the sights of the SPX. There should be resistance in this area, but it is not substantial. Look for the first level of support at 4395. And if you want to look at all the spaghetti-lines of support and resistance, take a look at the chart below:
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