S&P 500 is on a great rolling boil

BRING up to a rolling boil then leave for…. How long exactly? That is precisely the question that spread betters everywhere are asking about the S&P 500. It’s been climbing for two years now, smashing through glass ceilings like a highly caffeinated new-age woman. But – realistically – how long can the rally last?

The technical analysis whiz kids say it is a difficult call. David Jones of IG Index thinks it could just keep going: “The easier money is on running the long bet for the meantime, trying to pick a top could be an expensive game.” He thinks a sensible strategy is to buy whenever the number dips slightly.

Michael Hewson of CMC Markets has a more cautious view: “The S&P needs a good 5-10 per cent shake out, back down to the 12,700 level, but trying to pick a top is a fool’s game.” Quoting Keynes he says: “Markets can remain irrational longer than you can remain solvent.”

That said, Kully Samra of Charles Schwab thinks quite differently. He says the rally is the outworking of good fundamentals: a combination of healthy-looking US economic indicators, money flowing into US equities and the fact that we’re in a pre-election year should mean there is plenty of potential for a move higher.

Fascinatingly, Samra explains that the US has not experienced a pre-election year when US stocks were down since 1945. So far, this year is certainly not bucking this long-established trend.

“Sure people keep talking about the lack of jobs that have been created in the US, but employment is always low when the economy starts to recover,” Samra explains. “You have to have the recovery before the jobs are created.”

Hewson is less optimistic. “The state of the US is difficult to guess because the inflation figure is not an accurate reflection of the state of inflation – it excludes food and fuel – the most important factors. People have always got to eat and drive.” But he says that the extra cash quantitative easing has created could mean there is potential for another wave of mergers and acquisitions – something that will bring even more investors into the US market.

For now, we will have to wait for the S&P’s boiling point. And – as so often the case when cooking – trying to predict the moment the pan boils over is difficult. It will happen as soon as you look away.