Some analysts have alarmed bulls by pointing out the relative underperformance of the Nasdaq and the Russell indices, the failure to make new highs in key S&P leadership stocks and, yesterday, the 14 day RSI registering its highest overbought level since 1971.

We think a pause is possible even a small set back but note that major patterns are still driving the market forward and don’t look exhausted – yet.

The Technical Trader’s view:

WEEKLY CHART – The chart illustrates the period of the credit crunch – the fall to the 2002 low of 767. There market got down there and then, eventually, having formed a Head and Shoulders Reversal, bounced. The reward was the rally throughout 2009 and on (with a blip) into 2010. Notice that the minimum move indicated buy the pattern is still somewhat higher that present levels.

There is life in the market yet. Observe too, that the 1219 minimum target is very close to a horizontal resistance so that will be difficult to break up through – when the market gets there.

DAILY CHART – If the medium and long-term charts still have life in them, so too has this daily chart. But, the small, badly-formed, Head and Shoulders Reversal has almost achieved its minimum target of 1175. That target is not a resistance level but is frequently accompanied by a pause at the very least. The bulls will also rightly point to the way the market has superseded the Prior High at 1141 – bull trends ratchet themselves better by finding Prior Highs to be good support. Which incidentally, it already has been.

DAILY CHART- Bears of the market may not have had all their anxieties allayed. But the path of the VIX over the whole credit crunch period (nearly a mirror of the long-term S&P) has led to levels close to pre-crisis levels.

(Indeed, the March 10 contract fell steeply yesterday to 17.45.)

So downside protection is cheap and may get cheaper still…..

The Macro Trader’s view:

Last week was mainly dominated by two events: – The strong US retail sales report out last Friday, and – The FOMC rate decision and policy statement released on Tuesday this week.

The retail sales report was important because it showed strength despite some of the worst snow storms to hit the US for a very long time and bodes well for Q1 GDP due to be released next month.

The FOMC rate decision and policy statement re-assured markets that the Fed still intends holding policy at current low levels for an extended period, even though policy makers see clear signs of improvement in the economy.

So what does all this mean for the markets and especially US equities which are our focus for this week?

We judge the correction that hit the S&P in the early part of this year is now over. The sell off was driven mainly by fears arising from the Greek government debt crisis. That crisis began to be tackled by the Greek government implementing a tough austerity package backed by pledges of financial support from other EU/Euro zone leaders. And although that assistance still looks vague, traders have relaxed and turned once more to riskier assets, namely equities.

But the S&P also benefited from two further developments: – The run of US data has turned stronger after a period of ambiguity, and – Concerns have abated that a Greek debt default could have led to a domino effect on other highly indebted developed economies, including the US and UK.

So now we have an US environment in which consumer spending is holding up well, business spending is improving and the labour market could be on the brink of turning.

Add to this a benign inflation environment as evidenced by Wednesday’s PPI report which showed that the Fed does have the luxury of time. Time to wait before monetary policy needs to be tightened.

Although we currently think that tightening could begin later this year, low interest rates and strengthening growth should provide the back drop for the S&P to rally further.