Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

S&P 500 Grinds Higher, Regardless of Daily Setbacks

Published 05/27/2020, 12:20 PM
Updated 05/14/2017, 06:45 AM

The run-up to yesterday’s U.S. open and the regular session’s trading confirmed my call that stocks would break above the key resistances. And they did effortlessly overcome the upper border of March’s gap and the 61.8% Fibonacci retracement without really looking back.

Now that they trade also above the 200-day moving average, how far can the bull run reach?

S&P 500 in the Short-Term

Let’s start with the daily chart perspective

A resoundingly higher open followed by more buying before running out of steam 30 minutes before the closing bell – that’s a fair characterization of yesterday’s session. As it happened on reasonably high volume and the candle’s shape isn’t that of a profound reversal, the implications are bullish for the days to come.

It’s been only the 200-day moving average that provided resistance to stocks yesterday, and while the sizable upper knot isn’t a pleasant sight to see for the bulls, it will likely turn out to be a soon-forgotten mark in the slow grind higher that I expect to play out over the coming weeks. The best the bears can hope for in my opinion, would be a sideways digestion of recent gains.

That’s because yesterday’s session shows that the buying power is there, and the sellers haven’t been able to bring prices down much.

See this quote from yesterday’s intraday Stock Trading Alert:

Stocks are consolidating the sizable gains since Friday’s closing bell, and it’s accompanied by higher high yield corporate bond values. Up till now, the S&P 500 consolidation is taking shape of a shallow sideways trading range.

The current price action appears to be a case of back-and-forth trading only, as we see no signs of an impending reversal to the downside to act upon.

Technology is having one of its weaker days today so far, while healthcare is still range- bound and financials are steeply higher. Neither real estate or consumer discretionaries are disappointing, and the stealth bull market trio (energy, materials, industrials) is higher too.

Would the credit markets’ closing prices still confirm the bullish take on stocks?

The Credit Markets’ Point of View

High yield corporate debt ((NYSE:HYG) ETF) predictably opened higher yesterday, but just couldn’t keep the intraday gains. On the other hand though, the bears didn’t get their way either. On respectable volume, junk corporate bonds closed little changed from where they started the day, which means that we’ve most likely seen a daily consolidation only.

While further consolidation of recent sharp gains wouldn’t come as a surprise, I think it’s more probable that the bullish bias will prevail over the coming sessions, and that this leading metric of credit market health would go on to serve as a tailwind for stocks.

No material change here either - the moves in stocks and the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) continue to be moving in lockstep. Crucially for the stock bulls, this gauge of bullish spirits remains on their side. Simply put, the setback stock bulls suffered in the last 30 minutes of yesterday’s regular session, is nothing the sellers could call home about.

The ratio of investment grade corporate bonds to long-dated Treasuries (LQD:IEI) also shows no divergence when compared to the HYG:SHY ratio. It means that we’re in a risk-on environment and the riskier HYG:SHY ratio is firmly in the driver’s seat.

Key S&P 500 Sectors in Focus

Technology (XLK ETF) was rejected at the gates of the upper border of the late-February bearish gap, declining powerfully in the last 30 minutes of the regular session. The volume was elevated, but nowhere representative of a real reversal that’s about to stick. That makes me think any potential follow-through will be readily absorbed by the buyers, and we’re likely to see yesterday’s open overcome before too long. Healthcare (XLV ETF) brought us another long red candle, but on relatively lower volume – and that means even smaller bearish short-term implications than could be the case for technology. In other words, I expect a return of the buyers in both of these key sectoral ETFs pretty soon.

Financials (XLF ETF) have been the star heavyweight performer of yesterday’s session, coming within spitting distance of both April local tops. Financials rose on outstanding volume, and kept half of their intraday gains, which makes the outlook for coming days bullish.

So, we see the three sectors positioned for more gains, would the rest of the crowd agree?

Consumer discretionaries (XLY ETF) certainly would as they kept much of their opening gains intact, unlike technology. Real estate (XLRE ETF) also showed up strongly. As for the stealth bull market trio, all three - energy (XLE (NYSE:XLE) ETF), materials (XLB ETF) and industrials (XLI ETF) – moved higher, with the industrials leading the pack. That’s a bullish combination, boding well for stocks over the coming weeks.

Summary

Summing up, yesterday’s session brought us powerful follow-through buying and less and less in terms of resistances is standing in the bulls’ way. The 61.8% Fibonacci retracement and the early March gap are history, and soon will also be the resistance provided by the 200-day moving average. Both the credit market and sectoral analysis favor this bullish takeaway.

So does the Russell 2000 upswing as stocks ignore the rising US-China tensions, and instead focus on a new 1-trillion euro stimulus package across the Pond. The lasting move above the 200-day moving average would be for starters only, as I expect stocks to slowly grind higher overall despite the high likelihood of sideways-to-slightly-down trading over the summer. But before that, the ball remains in the bulls’ court.

Latest comments

Thank you!
The ghost of Fauci is in everybody's head and are having FOMO
Excellent article! Thanks.
Monica, brilliant analysis however as you can read the rest of the comments. your business would be doing better if you went Northman Trader style, full bear analysis. ( but behind the scenes you are full bull) 😝
Thank you very much, I know precisely how you mean it, but I couldn't square that with my conscience. People are looking for an honest and unbiased view, one that would preserve and grow their money in these challenging times. I'm sure a doom-and-gloom analysis would read well (fear sells in the media), but what's the point if people would bleed out as a result? It's impossible to go full bear and say in one breath that I'm full long and make money this way. Long-term, people will be happier if they read something valuable, insightful and actionable that gives them profits too...
Of course - whatever the market action, there is an exceptional commenter that isn't happy whether I am long or short, and claims one day that he can lose money all by himself, and the next that he's been doing the opposite of what I've been doing and is swimming in dough now. If he really was short as I went long, he faces a 110-point open loss this very moment. My point is to focus faithfully and wholeheartedly on making money and bringing sharp and timely analysis to those guys and gals who want to win in this game - I want to see people doing just great !!!
No offense, but this Sunshine Profits girl is looking at the wrong metrics. Let us see what unfolds over the next 5 weeks. I anticipate a strong pullback after this week finishes on a high note near 3100. My pullback target is the 2700 on the SPX.
Thank you for your comment. I trade the market in the now, and will react accordingly to whatever it brings me the next week, the week thereafter, or as you say over the next 5 weeks... I agree with you in that I expect a pullback later over the summer, but I think it would be more shallow than you suggest. Either way, that doesn't matter right now, for I'll adjust to the incoming information as we go, and keep you all in the picture
hello
She is on crack, the one getting distributed by Federal Banks.
Monica. Not sure what universe you’re living in, but this market is going to tank over next few weeks. And throughout the remainder of 2020 and beginning of 2021 when the truth comes out.
Maybe shes just gambling cause thats what it is at this point.. biggest robbery of retail investors in history and most living off teet
What a bright future with FED and ECB blowimg the sails faster and bigger ....
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.