STOCK INDEX FUTURES, TECHNICAL AND FUNDAMENTAL ANALYSIS
There is a rule of thumb that new record highs suggest follow-through strength is likely. When new historical highs were made in August of 2020 it was an indication that there could be additional gains, which proved to be the case.
Chart 1: S&P 500 Futures - Monthly
The latest new highs were registered in February 2021. This rule of thumb also worked when new record highs were made in April of 2019. After a brief correction, futures advanced to a new historical high in July of 2019. This rule worked well in July of 2016, as futures continued to advance into January 2018. In addition, this rule worked in April of 2013 when new highs were registered, and futures continued to advance into May of 2015.
In some cases, the additional strength can be substantial. The logic behind this is that, if the fundamentals are powerful enough to propel a market to new historical highs, they are probably strong enough to persist for a while longer and push prices even higher (Chart 1).
The patterns on the Dow Jones futures chart are very similar to the patterns on the S&P 500 futures chart. There are multiple examples of the successful application of the rule of thumb that new record highs suggest follow-through strength is likely. The latest instance occurred in November of 2020 when another round of historical highs was registered. This was followed by a series of record high futures prices in 2021 (Chart 2).
WHAT IS THE DOMINANT FUNDAMENTAL ACCOMPANYING THE “NEW RECORD HIGHS”
Source: Chart from QST Chart 2: Dow Jones Futures - Monthly
RULE OF THUMB? In light of this technical rule of thumb, it has to be asked what are the fundamentals that have underpinned the historic advance in stock index futures that began in March of 2009 and remains with us today? The answer I believe is the interest rate influence that history has shown to dominate all others. This fundamental ultimately dominated over a multitude of temporary bearish influences that have sprung up in the past decade, including political turmoil, U.S.-China trade disputes, banking crises, crude oil price shocks, severe weather related economic downturns and the pandemic. Short-term interest rates in the U.S. remain near zero and the Federal Reserve has pledged not to hike its fed funds rate until possibly 2023 (Chart 3).
Source: Chart from QST
20 | ADMISI - The Ghost In The Machine | Q1 Edition 2021
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