The bulls are showing real staying power above the early June highs as Friday's bearish candle marked not an upcoming downside reversal, but a bullish comeback. Following yesterday's slow but sure climb, the rally's internals understandably improved. But isn't too much greed present in the market place?
It rose a notch, but isn't roaring back. Far from it. The data for the week ending July 29 show that 20% bulls faced 49% bears, while 31% of investors had a neutral outlook (AAII). This is not what all-out greed looks like, and as such, it can power the upswing higher – regardless of the put/call ratio moving down these days.
You know what they say happens when too many people get to one side of the boat…
S&P 500 in the Short-Run
I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):
This breakout attempt above the early June highs has legs, and yesterday's lower volume after Friday's high-powered reversal is no obstacle. It's actually consistent with the path many uptrends in bull markets take. Prices haven't risen as not enough sellers were willing to step in – that's how I read it.
Let's check how the credit markets did.
The Credit Markets’ Point of View
High yield corporate bonds (HYG ETF (NYSE:HYG)) didn't exactly keep all their Friday's gains intact, but didn't profoundly decline either (please see this and many more charts at my home site). Monday's candle is one of consolidation, and its volume says that it would be very premature to look for signs of an impending reversal.
The caption says it all, and both leading credit market ratios – high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment-grade corporate bonds to longer-dated Treasuries (LQD:IEI) – are moving in lockstep higher, with the more risk-on one doing relatively better these days.
While that makes HYG:SHY vulnerable to short-term gyrations, unless LQD:IEI also rolls over, it would be a very temporary development. For the record, I don't look for either ratio to roll over, and see them as supporting the stock upswing.
The chart of stocks to all Treasuries ($SPX:$UST) highlights the progress stocks are making relative to the safety of instruments backed by the full faith and credit of the U.S. A breakout above the early June and mid-July highs is arguably a matter of time only.
The overlaid S&P 500 closing prices (black line) against the HYG:SHY ratio don't scream danger for stocks. The rebound leaves stocks a little extended in the very short-term, but also reveals their readiness to lead.
As I am not looking for the HYG:SHY ratio to roll over, the stock upswing looks set to reach higher over the nearest sessions.
Small Caps and Emerging Markets
The S&P 500 closing prices overlaid with the Russell 2000 ETF (NYSE:IWM)) paints a bullish picture of short-term small-caps resilience. It needn't be an issue that yesterday's IWM upswing occurred at smaller volume – I look to the close near the daily highs as more important from the momentum point of view.
As long as the 200-day moving average in IWM doesn't see prices retreating to its proximity, the dynamics of the small caps move bodes well for the 500-strong index.
Emerging markets (EEM ETF (NYSE:EEM)) are taking a short-term breather, which is perfectly understandable now that the dollar is finally showing some signs of life. So, the light has turned from green to amber based on this chart alone.
But as higher highs and higher lows are the norms these weeks, the S&P 500 path of least resistance remains up.
S&P 500 Sectors in Focus
Technology (XLK (NYSE:XLK) ETF) has risen again, and it doesn't have to thank Apple (NASDAQ:AAPL) for that. This highflyer suffered a daily setback, and gave up most of its intraday gains, by the way. The key thing though is the gradual return of momentum into the sector.
Healthcare (XLV (NYSE:XLV)) indeed delivered an upside surprise, and materials (XLB (NYSE:XLB) ETF) aren't too far from stabilizing and moving higher next, too. Defensives (utilities and consumer staples – XLU ETF (NYSE:XLU), and XLP ETF (NYSE:XLP), respectively) maintain their strong posture as the leading sectors in the currently unfolding rotation. Also, I look for financials (XLF ETF (NYSE:XLF)) to start catching up a bit more visibly.
Summary
Summing up, Monday's trading extended the S&P 500 gains amid improving rally internals such as the advance-decline line moving to positive territory with plenty of room to grow. Volatility's (CBOE Volatility Index) spike lower is also a welcome preview of things to come. The credit markets' posture in corporate bonds' ratios isn't merely on account of briefly pausing Treasuries (yes, I am looking at you, long-dated ones – TLT, TLH). While these indicate a possibility of the S&P 500 briefly declining, it's the small caps and emerging markets resilience that keeps painting a rather bullish picture for stocks.
Disclaimer:
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.