S&P 500 Bulls Got Tested – All-Time Highs Next?
Sunshine Profits | Aug 11, 2020 10:48AM ET
Stocks are getting so much closer to the all-time highs – day in and day out. The bear raid I anticipated, has been soundly defeated yesterday, stocks are extending gains and adding to my open profits Sure, greed is elevated, but not absolutely extreme. There aren't too many traders willing to make the contrarian bet and buy puts – the put/call ratio keeps hanging at the early June lows.
Yes, consider the stimulus conundrum kind of solved for now, and with the Fed support in the wings, the real economy realities can wait and be overshadowed by the China rebound stories and positive German sentiment readings. With the U.S. markets taking a cue and ready to bridge several quarters ahead, the path of least resistance in the S&P 500 is still higher as it's way too early for the elections uncertainty to hit like a sledgehammer.
The rising trend in Treasuries has been punctured by a two-day breather now, helping to fuel the bullish spirits in stocks – the conventional wisdom goes that when yields rise, the economic recovery has legs. With the dollar rally running into headwinds yet again, the risk-on trades gets another ally.
Last but not least, the correction in gold I called for on Friday to happen, takes away from the momentary inflation fears. And inflation rearing its ugly head, that would have the power to throw the stock bull out of whack. We aren't there yet.
h2 S&P 500 In Short-Run/h2I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):
Stock prices are steadily climbing higher, and yesterday's rising volume shows that the bears didn't attack in a really convincing way. Not too much firepower was needed to overcome them. Undeterred, stocks keep reaching higher.
But the February all-time highs are drawing nearer, and so does the upper border of the rising black trend channel on the weekly chart I featured yesterday. It's likely that these levels would result in fiercer battles fought.
As yesterday's downswing didn't turn into a correction, do the credit markets indicate smooth sailing ahead now? Not yet, not fully – that's my take.
h2 The Credit Markets’ Point of View/h2The sideways trend of recent days in high-yield corporate bonds (HYG ETF (NYSE:HYG)) goes on, and doesn't really attract much selling pressure on (please see this and many more charts at my home site). And with ongoing fiscal and monetary support, how would it all of a sudden?
Get The News You Want
But investment grade corporate bonds (LQD ETF (NYSE:LQD)) are declining second day in a row. That makes it a correction, not a reversal though. Let's not jump to conclusions, as a higher high is still likely to be made.
The overlaid S&P 500 closing prices (black line) keep trading at very extended levels relative to the HYG:SHY ratio. Again, the same question as yesterday pops – has the index reached a tipping point where the bears would step in?
That could still happen this week (especially if corporate bonds start to move down from their high plateaus), and the bulls better have gains locked in preparation for such a possibility however remote that might seem now.
Three good reasons why the stock rally has a high likelihood to go on, and not just today, follow.
h2 Smallcaps, Emerging Markets And S&P 500 Market Breadth/h2The Russell 2000 (IWM ETF (NYSE:IWM)) finally overcame its early June highs visibly. Its momentum is quickening versus the 500-strong index momentum. No signs of distribution in smallcaps favors the stock upswing to go on.
The Dow Jones Industrial Average had a strong day yesterday, and NASDAQ Composite erased much of its intraday decline. Yes, tech (XLK ETF (NYSE:XLK)) is moving back to the pool position in the sectoral overview of S&P 500 advance drivers.
With a stalling dollar, the emerging markets had it easier to find a floor. And their strong performance since early July didn't really suffer. The bulls still enjoy the benefit of the doubt.
The S&P 500 advance-decline line is the third reason in favor of higher stock prices. Its upswing yesterday put to rest the scenario of a very short-term bearish divergence in the making. The short-term view of the S&P 500 market breadth remains more healthy than not overall.
Summary
Summing up, the S&P 500 upswing goes on, and yesterday's attempt to move lower proved very temporary. The sentiment is risk-on again even as stock market metrics relative to the credit ones keep being very extended. The February all-time highs keep acting as a magnet, but better be ready for the possibility of a move lower in stocks arriving with little fanfare.
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.