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Why The Current Weakness In S&P 500 Is Deceptive

Published 07/16/2020, 10:22 AM
Updated 07/09/2023, 06:31 AM

After Tuesday's bullish reversal, S&P 500 intraday consolidation came. How to read the doji just in? In today's analysis, I'll lay out the case for why I consider it to be healthy base-building—a springboard for stocks to take on the early June highs.

S&P 500 in the Short-Run

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

S&P 500 opened with a bullish gap, and defended it to the close. The volume has picked up again, and the pressure to go higher is building under the surface in my opinion. I says so because should the bears be willing to sell heavily in the 3220-3230 zone (potential double top area), they would have done so—the fact they haven't been willing to push prices materially lower, is telling by itself.

Yes, the volume behind the upswing off the late June lows hasn't been outstanding, but only prices falling sharply and preferably also on rising volume, would make it a double top. Prices merely approaching previous local top don't make it so, and could trick the bulls into taking profits off the table prematurely. The battle to overcome them might not turn out to be all that fierce in the end.

Yes, we have short-term indecision in the S&P 500, and the early June highs are keeping the gains in check so far. But which way are the scales really leaning?

The Credit Markets’ Point of View

High Yield Corporate Bonds

High yield corporate bonds (HYG ETF) also gapped higher yesterday. Sticking to their opening gains, they've left the trading range of recent sessions. While the volume hasn't been outstanding, it still hints that the path of least resistance is higher.

HY Corporate Bonds Vs Short-Term Treasuries

Both the high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) are moving in unison. The dynamic is conducive for further stock market gains as the early-May example of LQD:IEI leading HYG:SHY higher shows.

Looking under the hood of the S&P 500 thus reveals that stocks aren't getting vulnerable and extended in any dramatic way. Their upswing continuation is amply supported by the credit markets.

Volatility, Smallcaps And Sectoral Analysis Weigh In

VIX Volatility Index

The VIX has been confined to a relatively tight range throughout July, yet stocks kept their upside momentum. And I expect the upcoming volatility readings not to throw a spanner into the stocks' works.

Yesterday's move in the Russell 2000 (IWM ETF) is a groundbreaking development. After weeks of lagging behind within the lower bounds of the small caps' relative performance, the IWM ETF finally sprang higher.

Russell 2000 ETF (IWM)

The IWM chart shows the strength behind yesterday's move precisely. Sizable opening gap, extension of gains throughout the session, and finishing near the intraday highs. Coupled with strongly rising volume, that's a bullish combination—especially that this is another attempt to overcome the 200-day moving average.

Technology ETF (XLK)

The tech (XLK ETF) bulls are ready to buy every dip, aren't they? While its heavyweight stocks are bidding their time, the semiconductors (XSD ETF) keep their relative strength, and have actually closed at new 2020 highs. Once the Amazons and Microsofts of this world decide that their consolidation is over and join in, the S&P 500 stock bulls would get a mighty ally.

So far, healthcare (XLV ETF) is doing the heavy lifting, joined by financials (XLF ETF). Yes, cyclicals are firing higher as the materials (XLB ETF) or consumer discretionaries (XLY ETF) show. Both energy (XLE ETF) and industrials (XLI ETF) ticked higher yesterday, too.

Summary

Summing up, given that tech keeps largely dragging its feet in the short run, the S&P 500 rendezvous with the early June highs just underscores the cyclicals taking the baton. Talking other short-term signs of life, the Russell 2000 has unequivocally spoken yesterday. Credit market signals, emerging markets outperformance and very long-term Treasuries pausing also raise the odds for the stock upswing to continue once tech is done with its consolidation. And chances are it would soon be, because semiconductors are quietly making new highs.

Forget US-China tensions, the Fed's rare weeks of cautious tightening, or new lockdown fears. Banking Q2 earnings have been largely met with market applause, and there seems to be a never ending stream of positive vaccine news that boosts the bullish spirits. The strong stomach to withstand sudden downturns in market perceptions of risk that we mentioned yesterday, might not be called upon all that often, after all.

Latest comments

Excellent analytics as always Monica, thanks. I do have problems with market breadth though. Tech titans have added $800bln of market cap above the late Jan/Feb highs so to my mind they are the key. XLV and BTK have done well to take out the highs too, but the rest of the sectors drag badly. BKX should be doing alot better especially with 2s/10s holding near 50. LQD is a function of yield chase and seems to have dragged JNK and HYG with it. To me the early July highs look more like gap filling so the proof will be with the double top from early June. And this time around we wont have the relative support from BKX XLF XLI etc.. VIX appears to be cautious here too trading 3 points above the June lows. I've just bought SPX puts as a consequence so we'll have to see.
Thank you for doing the analysis and being transparent/objective about it.
Honest and bias-free - always... Thank you!
Well you have a 50/50 shot Monica but my money is on double top you have given no evidence fundamentally to sustain this for the future however long it stays priced as such. One thing for sure is unless the government keeps giving handouts to the unemployed we cannot maintain this level as it is simply not valued correctly it is priced on 3% unemployment and continued growth. If schools don't open we are in trouble even with the printer running 24/7. Are you a permabull?
No permabull - I have never been hesitant to jump on the short side (please see the Performance Page on my home site, there are many shorts). It's just that the charts have been rather on the bulls' side, the fundamental-reasoning-given crash prospects haven't been materializing for quite a while. That was the outlook yesterday, and in today's analysis, I'll deal with what has changed and what has not
Fundamentals don't matter in the short term. Short term price action says higher prices are coming. No reason necessary for a trader to be bullish and make money. Price is the ultimate arbiter and price is always right.
Perhaps, but a double top of historic proportions it would form. Watch out below!
We have more gas in the tank. A lot of people going to cover Monday when we gap up. Pies in the face.
Yes, bulls are technically stronger now.
Hahaha nope!
perfect storm coming, it's been all about the Fed offsetting the effects of corvid with 80 billion a month in liquidity going into the market every month. now the CDC numbers are being redirected to the Whitehouse presumably to shave the numbers which will fail bigly. the real virus numbers will be revised down causing the fed to pullback support, then we'll have millions of unemployed with no stimulus, reduced fed liquidity and a sickened population. buying small caps now could mean losing 50% later. there's no leadership, everything the current administration is doing is to prop the market up for a couple more months but the end result will be disastrous for small caps.
Have you seen the CDC chart I featured recently? Yes, markedly down from spring. And isn't it the riots rather than reopenings that driving cases higher? That's my take.
 No I have not seen your CDC charts. I think the reopening and people being careless is creating the new hot spots. What are your thoughts on QQQ....I think sector rotation this week had money leaving tech but that also it gave QQQ a chance to cool off to put higher and maybe test the highs.
See my July 9 article "The Renewed S&P 500 Upswing Is Coming". I'll surely feature thoughts on XLK on Monday
Isn't it weird to have FAAMG rise 35%, while rest of sp -9%? Was this recipe for this and that? If somebody buys like mad, is it strategy to join?
I just follow the charts and market's evolving sensitivity to narratives, and see more chances than not for the uptrend to continue, thus my yesterday's article. Some sectors lead, some lag - and yes, if the share of stocks over their 200-d MA were much greater, that would be splendid. But we don't live in an ideal world, do we? This is what we have
Thanks again for the timely article. do you have any trade advice service?
At Sunshine Profits, I am the author of Stock Trading Alerts and Stock Investment Updates. The first one includes my trading positions and real-time intraday updates
thank you.
seriously
Well I see TLH at record levels,  only a notch smaller than its peak at march. This was not the case in June, and it is steady rising since then. I'd be very cautuous with Monica call to disregard everything and stare at these 3 points ahead. What about the 17 points downside risk to DMA? It was crossed many times now, will it hold every time?
On one hand, rising bond yields lend credibility to the recovery story. On the other hand, decreasing real interest rates (reward for holding bonds once rate of inflation is reflected) drive the TINA trade (factor in also dividends). Plus, the article's analytical points support the bullish takeaway
i can feel it......
 hope is even more dangerous? i wish s&p500 TP 3700 before end of this year, hahahahaha
 When you spend time near a resistance without getting rejected...that's the market building energy for the next move higher...likely a gap up for Monday and a big one. The rejection was on 7/13 and on 7/14 the market undid most of the damage. on 7/15 thru 7/17 the market balanced. Bears could not take it down or fill the gap at 318.89 on 2 attempts. The 2nd time up the resistance isn't the same...this time they back up to get the job done. I expect a gap up Monday...they could ********out that day but they are trying to break out...could ********out by end of the week.
Well done, you're going deeper into my Friday article's one-sentence post: "Yes, S&P 500 is nicely set up for Monday premarket session"
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