Last week, the S&P 500 had a notable post-election rally, as technology related companies helped push prices higher.
However, analysts at Wells Fargo (NYSE: However, beneath the surface level optimism of the market, WFC warns that the market might pull back. Other major indices also posted declines, but the S&P 500 was up 0.38% month to date through December 17. In the same period, the Dow Jones Industrial Average fell 3.12 percent and the small cap Russell 2000 Index 4.06 percent.
The divergence, Wells Fargo says, is driven by weaker economic surprises as measured by the Bloomberg U.S. Economic Surprise Index. The index, which measures how economic data has performed versus consensus expectations, has fallen since peaking in mid-November and is now just above zero.
But Wells Fargo says equity markets have actually been quite positive since the elections, and that’s ‘concerning.’ They say investors are too prone to looking to a brighter future, rather than the disappointing data already in the bag. The disconnect may have to be resolved soon, warns Wells Fargo. Historically, disillusionment following an inauguration can hit markets when high expectations fail to match reality in policymaking, the bank says.
As the S&P 500 approaches overbought territory, Wells Fargo recommends investors stay disciplined and bring equity allocations back into line with recommended levels. We think it’s a good time for disciplined investors to check that their allocations to equities are not above what we recommend given long term interest rates offer a solid alternative, the firm adds.
Technical indicators, however, do not change the fact that the S&P 500 is in an uptrend. Resistance stands at the recent high of 6090, with key support levels at the 50-day moving average (5920) and the 200-day moving average (5515), according to Wells Fargo.