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The Case for Higher Stock Prices

Published 08/17/2020, 10:28 AM
Updated 05/14/2017, 06:45 AM

Refusing to decline or rise intraday, stocks are getting ready for a sizable move. And I think it would be to the upside. But it might not happen without moving lower first, as the flattening VIX shows. The advance decline line doesn't really bring much short-term clarity to the picture either, but the bullish percent index is solidly in a bull market territory.

And in times that try the patience as these, that's what hints at what the prudent course of action is. Stepping back, and checking the big picture. Are the bullish premises still valid? Any cracks in the dam emerging?

I still see that the bulls deserve the benefit of the doubt, and the reasons why follow.

S&P 500 In The Medium- And Short-Run

I’ll start today's flagship Stock Trading Alert with the weekly chart perspective (charts courtesy of http://stockcharts.com):

Such were my comments on the weekly chart 7 days ago:

… Bullish price action for many recent weeks on volume that isn't yet inviting increasing participation of the sellers. This fact alone bodes well for higher stock prices in the medium term, but the buyers will meet a set of two key resistances shortly.

It's the February all-time highs that are drawing nearer day by day, and the upper border of the rising black trend channel.

The measured move higher continued, and volume decreased again, which doesn't point to the bears' willingness to step in just yet. Given the background of no stimulus deal thus far, and the election uncertainties going beyond taxation, that's actually encouraging.

The daily chart shows the S&P 500 hesitation in short run perfectly. Volume is progressively declining, and a bigger price move is needed to entice market participants to act. And odds are, that it would be in line with the predominant direction, which means higher.

The Credit Markets’ Point of View

High-yield corporate bonds (HYG ETF (NYSE:HYG)) can't find a strong bid lately, but the selling pressure appears abating. And so is the pace of daily declines losing steam to a degree.

Does the recent string of lower prices usher in a downtrend? Doesn't seem so just yet. Thus, I view it as a correction within an uptrend. It's a consolidation while waiting for the coming Fed move as it comes to weekly balance sheet increases, and more positive economic news.

But the markets are about so much more than the Fed. The central bank is just one player, though with the deepest pockets. This is where other debt instruments come into play, and I mean the high quality ones, especially Treasuries.

The investment grade corporate bonds' dynamic (LQD ETF (NYSE:LQD)) is quite similar to their high-yield counterparts. Both are declining, yet could see stabilization shortly. And as the 50-day moving average and early July lows have been reached in LQD ETF, the high-quality bonds might lead the way higher.

Very long-term Treasuries mirror the deceleration of the plunge. But it's especially within these instruments that I see a confirmation of the real economy recovery story, and the justification of why rising yields will translate into higher stock prices.

Take a good look at early June – Treasuries were plunging in the runup to the surprise non-farm payrolls gain that corresponded with the upside breakout above the rising wedge on the S&P 500 daily chart. This raises the likelihood we'll see an upswing in stocks this time around too.

Smallcaps, Emerging Markets And Other Clues

Over the very recent sessions, the Russell 2000 (IWM ETF (NYSE:IWM)) was acting weak, but let's not forget that it broke above it early June highs earlier. This makes the currently retreating prices a correction within an uptrend as the smallcaps aren't losing sight of the 500-strong index.

Neither the emerging markets (EEM ETF (NYSE:EEM)) are signalling danger – after outperforming since the start of July, they're taking a breather currently. The base they're building, will give way to another upswing (that's the more probable scenario).

Copper keeps consolidating preceding months' sharp gains, and appears less and less likely to decline as time passes by. Should it take on the $3 level successfully, that would be another vote of confidence in the nascent economic recovery.

Let's recall my observations from last Friday on the metal with PhD. in economics:

… yesterday's lower knot indicates that the bulls have stepped back to a degree. That increases the probability that once trading leaves this flag, they will do so with a break higher.

Technology (XLK (NYSE:XLK)) keeps consolidating with a bullish bias, and remains the leading S&P 500 sector. Health care (XLV (NYSE:XLV)) is pausing, while financials (XLF (NYSE:XLF) ETF) are showing promising signs of life.

Summary

Summing up, S&P 500 has been going nowhere lately, and the market sentiment can be characterized as one of greed. Encouragingly for the bulls though, the bears are coming back to life as the slowly rising put/call ratio shows. That means the bullish side of the boat got less crowded. The economic recovery story is gaining traction, and stocks are likely to be helped in their upswing once long-dated Treasuries level off, which could help corporate bonds catch a strong bid again.

While the air near the February all-time highs is quite thin, the bulls aren't looking to be at the end of their rope.

All essays, research and information found above represent analyses and opinions of Monica Kingsley and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Monica Kingsley and her associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Latest comments

the case for lower stock prices: economic recession, highly overvalued stock and no more fools left to sell to..market will drop significantly very soon
The bulls can still cash profits regardless. It's always a question of open trade management.
I appreciate your efforts to provide me with tools and knowledge I don't otherwise have as a investor and not a professional. I actually can understand and extract from your analysis to the degree I need to. Thanks MK.
Randall Wagner: Thank you very much, I appreciate you saying these words not for the first time. Yes, it's my intent to really help people in these trying times. If you and anyone else would like to say these lines publicly in the marketing sense of the word, please write to support at my home site. Thoroughly appreciated, you can help me personally a lot doing that!
Monica Thank You. Technially speaking its hard to argue against your analysis. The bank action today still suggest that not all is well despite the solid sp chart. Until tech falls its hard to get too bearish. The small cap strenght was a bit unexped for me. One thing I see with my eyes is inflation although its not really showing in bonds it is present and makes me a bit hesitant in general.
Thank you. Financials have been lagging in the long rally - their time usually comes later in the cycle. Inflation? You haven't seen nothing yet - it'll take time to be felt in the system more profoundly. Back in the 2007-9 crisis, new money ended up and remained within banks' balance sheets, while now it goes into the economy directly. A world of difference when it comes to CPI
Up she goes, hiho
I see hesitation before a breakout and it doesn't help corporate bonds are diverging from equities.  We'll see what happens, but most likely the bull market will continue after a retrace.
I agree about a certain air of nervousness just below these highs, and welcome the fact that credit markets are turning today in line with the odds presented
You're right, high yield bonds are hinting at a resumption of risk-on today if they can decisively breakout of their bearish channel from August 7th.  Investment grade bonds seem to be still struggling but that is indeed a good potential bottom.
 Thanks. With the solid HYG close, it's looking promising for the stock bulls
i respect technical analysis specially a good one like this, but alone makes an incomplete tool of analysis. There are a lot of markets going up, that doesn´t mean there are good news necesarilly, a lot of them are false hopes and the capacity to differenciate that depend a lot of comparing technical, fundamental and even qualitative data... as an investor and a latinoamerican political science how interact with people in a lot of emerging countries i can say to you that most of the emergin markets are up in hopes of a recuperation similar to the developed countries, and that is not going to happen in a lot of them, second wave here is almost a certainty, most of our health systems are not prepared, our culture is not prepared (latinos tend cheerful and warm people, sadly that social charasteristic is a desventage in social distancing) and we are in the begginings of a wave of political instability.
 I am going as deep as justified and not turning the analyses into fundamental, macroeconomic or societal bulletin. If you look at my trading results, you'll see that the risks are quite well taken care of - please remember that what I do about the outlooks presented, is reserved for subscribers. My maxim is to take care of the downside, and let profits grow.
I'd like to comment that Monica's analysis has been very helpful to me, and I do not find it overly optimistic. She gives one of the most comprehensive FREE macro breakdowns of many of the influential factors at play on the S&P you can find on the internet. If you go back and read some more of her articles she does actually issue warnings on when to be careful, specific signs that are red flags, and comments that if you are unsure stay out.I'm not saying that she knows everything about the market or will predict it's movements with 100% accuracy. No one can. However, to read this article, then say she is simply looking at the technicals of the SPX chart and playing on the FOMO exuberance is simply not accurate.The socioeconomics are still horrible in the US too. I have been surprised to see the market react as it does here. It has actually been Monica's articles that have helped me understand the microcosm of the S&P much better. It is not the economy. It is a group of businesses.
 Only now I have noticed your kind words, and want to thank you for them!
How many people work at Sunshine Profits, other than you?
Have you seen the About us, and then Company section?
You should start a You Tube channel if you haven't yet. Seems like you have alot to say.Thank you
 Thank you very much. Yes, I enjoy commenting and sharing what I know because it directly helps people. The video format is different, I wouldn't get that much carefully presented analysis in, and with my style, it could actually take more time to get out that crafted message through the way I am laying it out in writing. These articles will stay as the primary channel - but what would you appreciate hearing the most about?
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