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The S&P 500 Upleg Is Getting Underway

By Monica KingsleyETFsJul 31, 2020 10:20AM ET
www.investing.com/analysis/the-sp-500-upleg-is-getting-underway-200532599
The S&P 500 Upleg Is Getting Underway
By Monica Kingsley   |  Jul 31, 2020 10:20AM ET
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The battle for the S&P 500 to break above the early June highs is on, and the bulls are likely to win it more lastingly this time around, thanks to tech earnings. The runup to their aftermarket announcement has been promising, and more gains were added once the numbers came in. Can I turn from merely "cautiously optimistic" to "broadly optimistic" now?

That's the question I'll answer in today's analysis by examining especially the credit markets and sectoral performance.

S&P 500 in the Short-Run

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

Yesterday's intraday downswing was soundly rejected, and prices closed again near to the early June highs. The chop around the horizontal blue line just got a more bullish flavor. The anticipation of positive tech earnings turned into reality, and has the potential to carry the S&P 500 rally further.

Yes, that's true just as my comments yesterday on the frightening advance Q2 GDP and poor unemployment data, when I wrote that these concerns:

"(…) are likely to be brushed aside during the regular session's trading – I see the focus as being rather on the upcoming stimulus details and tech earnings."

So far so good—let's check the credit market performance next.

The Credit Markets’ Point of View

High Yield Corporate Bonds
High Yield Corporate Bonds

A very high volume day in high yield corporate bonds (HYG ETF) yesterday, with prices closing near their daily highs. That's a show of strength, and a supporting rationale to drive stock prices higher next.

Investment grade corporate bonds (LQD ETF) though didn't take part in yesterday's HYG hooray. At the same time though, they're not flashing signs that would make me doubt the HYG move higher.

HY Corporate Bonds Vs Short-Dated Treasuries
HY Corporate Bonds Vs Short-Dated Treasuries

The overlaid S&P 500 closing prices (black line) compared with the HYG:SHY ratio show how relatively timid yesterday's race to erase opening losses in stocks was. After the late-July soft patch in the 500-strong index, stocks are getting an increasingly stronger HYG:SHY tailwind these days. Is the resolution to the early July chop being repeated with a fledgling upswing? I think so.

S&P 500 Sectors in Focus

XLK - Technology Sector ETF
XLK - Technology Sector ETF

The renewed upleg in technology (XLK ETF) bodes well for the S&P 500, and even more so given that estimates were broadly beaten.

Healthcare (XLV ETF) recovered from the initial selling pressure, but its consolidation may have a little further to go regardless of the volume contraction that points to a bigger upcoming move. The drying selling points to an upside resolution more than anything else.

Financials (XLF ETF) also recovered from their intraday downswing, closing about unchanged. The volume though points at accumulation, which is likely to be followed by a move higher.

Consumer discretionaries (XLY ETF) keep trading in a tight range, and their intraday reversal on higher volume is similarly likely to result in another attempt to break above yesterday's close.

Industrials (XLI ETF) didn't dazzle yesterday, but the consolidation around their 200-day moving average is still likely to resolve with another upside move.

The first of the defensive sectors, utilities (XLU ETF) are still basing around their 200-day moving average, also with a bullish bias. The rotation into this value play is very much on.

The second one of the defensives, consumer staples (XLP ETF) keep the fire they've been on since late June, alive and well. While a consolidation of recent strong gains wouldn't be unexpected, the underlying bullish trend implications are undeniable.

On one hand, there's the theme of inflation in the pipeline, and steeply plunging greenback. But the reality of yesterday's advance Q2 GDP took some cream off the ETF's prices. As the dip was heavily bought, upcoming move higher appears inevitable.

Summary

Summing up, yesterday's S&P 500 rebound off the early session's lows got plenty of follow-through next, and is likely to carry over into today's session too. Tech earnings surprised on the upside, and so did the semiconductors (hello AMD). The rotation into formerly lagging sectors is helped by the tech regaining breath. Smallcaps performed in line with the S&P 500 yesterday, and emerging markets again took the baton. While the S&P 500 daily market breadth looks concerning (the advance-decline line moved to bearish territory) and so does the $VIX upper knot to a degree, the S&P 500 upswing is more than likely to run on, proving both factors as of fleeting and inconsequential nature.

The S&P 500 Upleg Is Getting Underway
 

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The S&P 500 Upleg Is Getting Underway

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Comments (15)
Felipe Varela
Felipe Varela Aug 02, 2020 3:19PM ET
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$NYMO & $BPNDX are in bearish territory nonetheless that doesn't mean a downside to play. Anyways reading a bunch of analysts both sides (bears&bulls) and good reasons for both. My conclusion, choppy days are coming and the range to play is pretty clear , day trading good to call.
Monica Kingsley
Monica Kingsley Aug 02, 2020 3:19PM ET
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Some degree of chop would correspond the seasonal tendencies of August, definitely. Good luck picking your solid RRR trades if your focus is solely daytrading these days.
Rafal Nowack
Rafal Nowack Aug 02, 2020 12:36AM ET
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market will crash any day. all charts show that I don't know why you don't see it or maybe don't want to see it?
Monica Kingsley
Monica Kingsley Aug 02, 2020 12:36AM ET
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Please see the below reply to Sabrina Ma. It shows just how I interpret and approach bullishness in the current setup. Nothing wrong having locked in Friday's open profits while letting the market show me whether it wants to overcome those question marks right now, or not.
Rafal Nowack
Rafal Nowack Aug 02, 2020 12:36AM ET
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let's see what happens. triple top on NASDAQ, double top on DJ and 500 . it's simple without any deep analysis. market will crash any day.
Monica Kingsley
Monica Kingsley Aug 02, 2020 12:36AM ET
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Rafal Nowack  You know, just because price of anything reaches its previous local top, doesn't mean that it has to roll over. Similarly, non-confirmations such as SPY:IWM etc can drag on for weeks and months, and get resolved at very different prices. Markets will show us indeed
Robert Flores
Robert Flores Aug 02, 2020 12:36AM ET
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Simple Rafael, you trade with the trend and momentum, both are up, you set a trailing stop to limit downside risk
Sabi Sab
SabiSab Aug 02, 2020 12:12AM ET
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SPX had a rare occurrence of not so perfect dragonfly dojis in all daily, weekly and monthly charts, NASDAQ's daily dragonfly doji was close to perfect.  I wouldn't be so optimistic about the market until candles show up after Monday's close. Now the market is only trending sideways, there's no bullishness until we have an impulsive breakout confirmation.  Plain and simple.
Monica Kingsley
Monica Kingsley Aug 02, 2020 12:12AM ET
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Thank you! I am still cautiously optimistic, not wildly optimistic - far from that, regardless of Friday's finish. The internals are not exactly strongest, and I am not looking at daily market breadth solely now. Sectoral analysis through looks better, must be said. Smallcaps lagging on Friday, which isn't good. I've been highlighting the need to ride the bets on return of the bulls with a reasonably tight stop-loss, which has been paying off for me as I still see an upside resolution more likely than a bearish one. The point is to control risk in this tight trading range (should an upside breakout last, the RRR would be really good)...
Sabi Sab
SabiSab Aug 02, 2020 12:12AM ET
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Yes, Monday's print will be important.  Will see how it goes.
Tom Pym
Tom Pym Aug 01, 2020 11:18PM ET
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Personally I think a test of all time highs is very possible.  Maybe even 340 considering new daily coronavirus cases appear to be on the decline.  VIX appears to be heading lower.  Going off of history it usually stabilizes about 20-30% above pre-crisis levels before heading lower if the bull market ends up having legs.  This would put it around the 17 to 18 level.  More stimulus is a given, the question is just when and how much though continued improvement in the pandemic situation would  amplify any gains from additional stimulus.
Monica Kingsley
Monica Kingsley Aug 01, 2020 11:18PM ET
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Not only a test, but overcoming Feb highs before 2020 is over, that's my baseline scenario still (and has been for months). Yes, VIX appears in the medium-term heading rather down. Closer to elections though coronavirus situation will get interesting - mark my words... And thank you for your comment!
Yatin Bavishi
Yatin Bavishi Aug 01, 2020 10:17PM ET
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Hi. Great work. What is the upside target? Should buy VXX puts? Thanks
Monica Kingsley
Monica Kingsley Aug 01, 2020 10:17PM ET
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Thank you for the appreciation. As for any upside or downside targets, I prefer to let the market tell me whether it is ready and strong enough to reach them or not. So, they're for orientation purposes merely, because I focus on risk management within any open trade. I cannot provide investment advice whether you should or shouldn't buy VIX puts. But I can tell you my short-term outlook for VIX. Thursday, Friday - sizable upper knots, which favors still another intraday attempt to move up in this falling wedge formation. This time though, my call for Monday's S&P 500 open position doesn't stem from VIX, because volatility gives a rather unclear picture right now..
Privacy Please
WTIHedge Aug 01, 2020 8:56AM ET
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Monica, Its hard to argue with your outlook. The highest probability trade is yet another nasdaq 100 all time high next week. Small caps headed lower imo. I prefer to not touch spy until it makes a decicive move in either direction.
Monica Kingsley
Monica Kingsley Aug 01, 2020 8:56AM ET
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Thank you. Indeed, tech isn't giving signs it wants to decline right now... What I like about your post, is the weight you place on your risk assessment.
George Pichurov
George Pichurov Aug 01, 2020 12:33AM ET
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bulls with bad brea(d)th. Also enjoy NASDAQ 3 std.dev extension on weekly and monthly chart (monthly above 3, can it get to 4 or 5 std. dev?)
Monica Kingsley
Monica Kingsley Aug 01, 2020 12:33AM ET
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I remember LTCM made reversion to the mean a cornerstone of their strategy - and how they suffered with the Russian default...
George Pichurov
George Pichurov Aug 01, 2020 12:33AM ET
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Monica Kingsley  no way that reverts, it can only go to infinity
Monica Kingsley
Monica Kingsley Aug 01, 2020 12:33AM ET
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George Pichurov  If there's no reversion to the mean on the table right now for you, does that mean the bear camp is getting less attractive for you?
Irvin Mermelstein
Irvin Mermelstein Jul 31, 2020 11:14PM ET
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There Russell 2000 and the Midcap 400 both down today. Shorted both, made money. Futures all opened down. The late afternoon pop was FOMO buyers and short covering for positions traders wouldn't hold over the weekend. Most charitable interpretation is that this was a quick relief rally before stocks continue their downtrend.
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Semih Unalan
Semih Unalan Jul 31, 2020 11:14PM ET
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No panic lasts forever. In every crisis, there are some traders that consistently loose money by holding on to their short positions when the market rallies. It is perfectly natural to go short if you believe the market will fall in the short term, but in the medium to long term market almost always goes up. Therefore to all my bear buddies out there; do not forget to place rigid stop losses and do not try to fight the market.
Monica Kingsley
Monica Kingsley Jul 31, 2020 11:14PM ET
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Semih Unalan  Yes, neither the long- or short-term one. I opined that Friday's opening panic isn't likely to reach far, and it didn't. Swimming against the tide and being stubborn without a pretty good reason, is... pretty dangerous. As for bears these latest weeks and tight stop-losses, cashing a consistent string of small losses regularly, is also a dangerous proposition... the trend is your friend - until it isn't.
Timothy Morrison
buzzer55 Jul 31, 2020 11:14PM ET
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Monica Kingsley  I'm hoping for a big gap up this week so I can get some UVXY cheapies:-) Just loving the volatility and play it both ways...with a bias towards the short side with this pandemic and the economic consequences that don't seem to matter to the market...yet, anyway. Bottom line is, money can be made in both directions, if played right
Robert Flores
Robert Flores Jul 31, 2020 11:14PM ET
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Monica Kingsley but it did get very close to that 3210 retest! Didn’t it?
Monica Kingsley
Monica Kingsley Jul 31, 2020 11:14PM ET
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Robert Flores  But you said that after 3225, there is no fomo for you this weekend. I considered a break below 3200 as not likely, and it didn't materialize - my long position is intact and riding the move as we speak. I can't stress enough this: it's not merely our outlook, but what we do about it in terms of trading decisions: intraday, swing, trade parameters, RRR....
Robert Flores
Robert Flores Jul 31, 2020 3:49PM ET
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Have a great weekend everybody! And may the fomo “not” be with you!!
Sean Livingstone
Sean Livingstone Jul 31, 2020 3:49PM ET
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There was fear in the market this morning. Not a fomo.
Monica Kingsley
Monica Kingsley Jul 31, 2020 3:49PM ET
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Yes, that was a timely fomo remark... Monday will be interesting, to say the least. Great weekend everyone !!
Sean Livingstone
Sean Livingstone Jul 31, 2020 1:33PM ET
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I agree with you again. My take - all indices trying to pull back to form long leg dojis. You know what that means. Last unemployment checks out today with no stimulus in sight, retails might be taking profit this morning to make sure they could pay their bills. Just my opinion.
Jonathan Strike
Jonathan Strike Jul 31, 2020 1:13PM ET
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This looks like a market ready to pull back, at least in the short term. 10 year treasury yields are at a low point (anyone want to venture a guess as to what that means?), and the index is trading very weakly today. Look for a close below the key 3230 support/resistance level. If it fails that point, watch yourselves next week everyone. IMO only think that creates a rally next week is stimulus deal news.
Tom Pym
Tom Pym Jul 31, 2020 1:13PM ET
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It closed at 3271, what does that mean?
Monica Kingsley
Monica Kingsley Jul 31, 2020 1:13PM ET
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Tom Pym  It means the bears weren't really strong at all. Seriously, you'll read more in my Monday's article
Ha Has
Ha Has Jul 31, 2020 12:45PM ET
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hello what's your outlook for Russell 2000 next week now that it's dropping badly today?
Monica Kingsley
Monica Kingsley Jul 31, 2020 12:45PM ET
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Its 200-d MA held as I was betting it to do. Volume has been heavy, and that's a good sign for the bulls
el karl
el karl Jul 31, 2020 11:22AM ET
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Be water(bullish), my friend....hahahahaha!!
Monica Kingsley
Monica Kingsley Jul 31, 2020 11:22AM ET
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Thanks my friend :) Bullish bet is paying off nicely. Have a great weekend!
Sean Livingstone
Sean Livingstone Jul 31, 2020 10:46AM ET
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Bears are willing cos iwm is leading down and only qqq is green
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Monica Kingsley
Monica Kingsley Jul 31, 2020 10:46AM ET
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Robert Flores  I know how you mean that, but the short-term momentum indeed reappeared after I entered another long. Still, we're talking the very, very short-term - I think the slight and constructive bullish bias will be more obvious before the closing bell.
Robert Flores
Robert Flores Jul 31, 2020 10:46AM ET
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Monica Kingsley for the tecord I just entered long 1/3 of my postion at 3238, 1/3 is left for the 3225 that iI missed earlier, and the last 3rd for the long shot 3210- the 5hr chart is looking very bullsih
Robert Flores
Robert Flores Jul 31, 2020 10:46AM ET
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Monica Kingsley 3225 reached, no fomo for me this weekend!! 😏
Monica Kingsley
Monica Kingsley Jul 31, 2020 10:46AM ET
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Robert Flores  Enjoy your weekend, I haven't changed my decision because indeed, the higher time frames aren't really looking bad :)
Robert Flores
Robert Flores Jul 31, 2020 10:46AM ET
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Monica Kingsley and yes, I do not trade with hard stops - I give it a chance for a long wick bounce back as most swings have that characteristic
Robert Flores
Robert Flores Jul 31, 2020 10:35AM ET
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Not yet! It has to retest the 3200 level
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Monica Kingsley
Monica Kingsley Jul 31, 2020 10:35AM ET
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Sean Livingstone  That goes without saying ;) I merely closed a previous long when prices were lower, and bought again at even lower prices :) Needless to say, I have been riding the upswing into the end, and I am long over the weekend
Monica Kingsley
Monica Kingsley Jul 31, 2020 10:35AM ET
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Sean Livingstone  I.e. I like to step away from the momentum without getting trampled on, and get back on under better circumstances
Sean Livingstone
Sean Livingstone Jul 31, 2020 10:35AM ET
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Monica Kingsley  definitely. One step at a time. :)
Monica Kingsley
Monica Kingsley Jul 31, 2020 10:35AM ET
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Sean Livingstone  I like to do such crisscrossing... Have been waiting for the market to take off as indicated by the more or less prevailing odds, or bets that tech would deliver on Thu Q2 earnings, yet it failed to move all that much. So I walked off with three little profits in a row to add to previous two instances of bigger gains, and now I am nicely in the black for a sixth gainer in a row... You know, the risk of being in the market during chop and tense waiting for a headline to help save the day, also counts - it's not just the profits, but the risk taken to reach them
Sean Livingstone
Sean Livingstone Jul 31, 2020 10:35AM ET
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We might be red this week until the stimulus bill passes. My projection would be spx stuck in range, not moving anywhere.
 
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