S&P 500 index is in an unstoppable rally; but there is one big risk
The S&P 500 index rallied by more than 0.50% as investors remained optimistic of the US recovery after the blockbuster US jobs data. The index is trading at $3200, which is the highest it has been since February. The upward trend mean that the index is less than 200 points below its YTD high of $3396.
V-shaped recovery hopes
The US created more than 2.5 million jobs in May. This data was better than the 8 million decline that analysts were expecting. The unemployment rate also dropped to 13% while analysts were expecting the number to climb to 20%. The impressive results, coming at a time when the economy is reopening mean that the likelihood of a V-shaped recovery is higher. This type of recovery happens when the economy contracts and then recovers very fast.
In a statement after the jobs data, the US president dismissed the idea of a V-shaped recovery. Instead, he predicted that the recovery will take the form of a rocket ship. A recovery will be a good thing for the S&P 500 index because it will increase the earnings per share by the constituent companies.
Weaker dollar to help S&P 500
The S&P 500 will also be boosted by a weaker US dollar since most companies in the index receive most of their income from abroad. In recent days, the US dollar has been on a freefall against most currencies. Indeed, the dollar index, which measures its performance with a basket of other currencies, has declined by more than 3% in the past 30 days.
Coronavirus risks rise
The biggest risk for the S&P 500 is a sharp increase in coronavirus infections in the United States after weeks of protests. As more states reopen, analysts believe that the number of cases will increase. That is because, protests increase the chances of the pandemic transmission. Worse, the protests are happening in cities like New York, where the number of infections is leading.
On the daily chart, the S&P 500 index has been in a sharp upward trend and is about to test the YTD high. On the daily chart, the price is above the 78.6% Fibonacci retracement level and above the 50-day and 100-day exponential moving average. The upward momentum means that bulls are in control and they will try to retest the high of $3396.
On the flip side, a move below $2928 will invalidate this prediction. This price is along the 61.8% Fibonacci retracement level and is also slightly below the 50-day and 100-day EMA.