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Fundamentals Offset Uncertainties

An alphabet soup of emotional concerns (China, the Dollar, Ebola and the Fed) is rattling the markets. The S&P 500 is now off more than 3% since the Sept. 18 closing high, as we enter a month that has witnessed the end of five of the last 10 bear markets, the crashes of 1929 and 1987, as well as the near-bear of 2011. However, we think worry over quantifiable issues lacks merit. S&P Capital IQ consensus estimates point to a near 7% increase in Q3 operating results, valuations are below long-term averages, and we don’t see a change in Fed policy taking place until mid-year 2015 at the earliest. As a result, we believe the current emotional instability will ultimately be dissipated by underlying fundamental support.

From a technical perspective, the S&P 500 closed below the lower boundary of the ascending trend channel. This break below 1952 has resulted in a bearish development that suggests that a further decline is likely toward lower support at 1904-16. The Russell 2000’s 1078-88 zone represents critical support. A break below would be bearish, as it would send this index to new lows on the year. Separately, gold’s bias will remain to the downside while below 1251, and only a move above this level would negate the bearish bias. The next lower support/target is 1179-81. Crude oil is again testing support at 90.43-91.24. Resistance remains at 93.18-93.88 and again at 95.45-96.00. A drop below 90.43 would shift the bias to the bears and target 88.70 as a next level of support.

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