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 Bulls Got Tested – All-Time Highs Next?

Published 08/11/2020, 10:48 AM
Updated 05/14/2017, 06:45 AM

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.

S&P 500 In Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

S&P 500 Large Cap Index.

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.

The Credit Markets’ Point of View

The 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?

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.

HYG:SHY.

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.

Smallcaps, Emerging Markets And S&P 500 Market Breadth

S&P 500 Lare Cap Index, Aug. 10, 2020.

The 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.

Latest comments

And those with access to my many intraday updates, were spared of the downside - I frequently issue new trade calls, and update existing ones' parameters... Risk-reward rules to me. But I am happy that you could have reacted even based on these once a day free analyses. Keep reading to see how I translate technicals, fundamentals and narratives into market outlooks and also actual trade calls featured in my Stock Trading Alerts.
Robert DZ, Randall Wagner, Bobby Armstrong and silent others: Thank you very much, everything is out there, plain in the open - even in the Monday's article I warned the bulls to tread carefully because of a bear raid this week being likely & in this article, I warned of a downswing arriving with little fanfare. I am always telling it like it. Whoever reads my analyses in full and daily, gets the most out of them..
I've been reading many articles, and many articles written by Monica and I can easily say that Monica's articles are more often right than not.
Gold selling off big again. Let the steady climb of the almighty dollar begin. I have a feeling tomorrows trading won't be for the faint of heart.
Like I said, as a comment to your last article, you warned us. Thanks MK
Zero fundamentals all time highs really where is good analysis
Such a prescient analysis from Monica. All would be wise to sit up and listen well.
Uvxy should be a good one to have for the rest of the week.
At least a 15% correction, that is what s next!
I'll present in tomorrow's article what's my take on the market outlook. I hope the bulls were as ready as me with tightly managed risk in their positions, which was one of the key messages of the above and preceding writings.
Jan you are correct. The worm turned with about an hour left of trading today. Look for this brief push up after hours to be ate up by the bears come morning.
hello
umm.. are u sure? market is crashing..
Ha Has: Within Tuesday's three intraday Stock Trading Alerts, I took long profits off the table, reentered long, and moved its stop-loss to make it a risk-free position. These happened after posting the above article.
no more testing,  crush the main door directly, hahahahaha
yes....all time high next...... yum yum delicious, hahahahaha
 I've been riding my profitable longs in recent days with tight stop-losses, because I smelled a rat. And it came on Tuesday.
 hahahahaha, whatever.......because i'm not day-trader, i'm holding my stocks for few weeks or maybe months
I know you don't day trade, I remember...
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.