Indices outlook

Since the markets found, at least, a temporary bottom at the beginning of January, we have witnessed a strong rebound in indices. The S&P 500 is up 9%, while the DAX is 7% higher and the FTSE 100 lags behind with a 5% gain.

For now, fears of a retest of the recent lows have proven unfounded. Faced with the chance to buy into stocks at cheaper levels, investors have reacted in a predictable fashion by buying the dip, as has been their previous practice.

But what happens now? The longer this steady grind higher goes on, the more confident investors will become that a return to the bull market is underway. Indicators such as breadth and momentum are no longer oversold, as would be expected after such a strong move higher. Now they sit in neutral territory; for example, the percentage of S&P 500 stocks above their 20-day simple moving average (SMA) is now at 59%, just above the one-year mean of 56%.

Should the market succeed in avoiding another major sell-off, the assumption is that further gains are the order of the day. After all, earnings continue to power this market higher, while operating margins are now higher than at any point over the past seven years. The economic situation remains compelling too, with 4-5% growth expected. JPMorgan has argued that this could increase to 7-8% if the US dollar continues to weaken.

Of course, there is always the possibility that a sell-off will materialise from here, with another tantrum over yields quite likely to be the cause, the slow recovery (rather than a sudden bounce back to all-time highs) is an encouraging development.