The S&P 500 had a notable post election rally last week, as gains in technology related companies helped to push prices higher.
However, analysts at Wells Fargo (NYSE: But beneath this surface level optimism, the market might be susceptible to a pullback, warn WFC. The S&P 500 was up 0.38% month-to-date through December 17, compared with other major indices posting declines. The Dow Jones Industrial Average lost 3.12 percent and the small-cap Russell 2000 Index fell 4.06 percent in the same period.
Wells Fargo says that the divergence is due to weaker economic surprises, as measured by the Bloomberg U.S. Economic Surprise Index. Since peaking in mid November the index, which measures how economic data compares to consensus expectations, has trended lower; it is now just above zero.
Equity markets have actually been rather positive since the elections, says Wells Fargo, and this is ‘concerning.’ Investors, they say, are too ready to focus on a brighter future rather than the current disappointing data. Wells Fargo warns that the disconnect may soon have to be resolved. The bank says historically markets can suffer post-inauguration disillusionment when high expectations meet the reality of policymaking.
Wells Fargo recommends investors remain disciplined and equity allocations are brought into line with recommended levels as the S&P 500 approaches overbought territory. In our opinion, it would be a good time for disciplined investors to make sure their portfolio allocations to equities are not above recommended allocations given long term interest rates are providing a solid alternative, the firm adds.
The concerns don’t change the fact that the S&P 500 remains in an uptrend, according to technical indicators. Key support levels are the 50 day moving average (5920) and the 200 day moving average (5515), with resistance at the recent high of 6090, Wells Fargo notes. Wells Fargo advises caution, concluding: S&P is vulnerable in the post-election run.