Two Steps Forward, One Step Backward in the S&P 500, Right?

Stocks defended the opening bullish gap, and scored further gains intraday before the sellers took over in the session’s final 45 minutes. Have we seen a turning point?

In short, that’s unlikely, and let me tell you why exactly I think so.

S&P 500 in the Short-Run

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

The day looked like the bulls were firmly holding the reins, but another daily setback struck as we approached the closing bell. I say daily, because the volume didn’t really overcome its recent highs, and stock prices haven’t suffered a profound setback either. All that the bears were able to achieve, was pretty much reminiscent of the stock behavior during the unfolding breakout above the 61.8% Fibonacci retracement.

In other words, yesterday’s setback isn’t really a fly in the ointment for the bulls. The daily indicators keep supporting the bulls, with no imminent sell signals. The sky still remains clear for the buyers for now.

Yesterday’s intraday Stock Trading Alert captures the key reason why:

(…) Against the backdrop of strengthening high yield corporate bonds (HYG ETF), the S&P 500 upswing has been progressing nicely throughout the day, and a local top in either seems to be very far away indeed.

While the sellers might try to close the week and month on a bearish note, the above words ring true also today because we haven’t seen junk corporate bonds falling through the floor. Let’s see precisely what I mean by that.

The Credit Markets’ Point of View

High yield corporate bonds (HYG ETF) gave up all their gains since the market open, but the relatively low volume of the daily upswing rejection continues to favor the bulls. While it wouldn’t come as a surprise to see a sharper consolidation of recent sharp gains, a running consolidation with higher highs and higher lows is all we’ve been getting so far. And that’s a very bullish type of consolidation, boding well for the credit markets.

In short, the credit market uptrend is well established, and serves as a tailwind for stocks.

The chart of the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) with the overlaid S&P 500 prices (black line), also supports the view we haven’t seen a game-changer yesterday.

Key S&P 500 Sectors and Ratios in Focus

While technology (XLK ETF) gave up its intraday gains, the swing structure of higher highs and higher lows, remains intact. And that’s the definition of what an uptrend is. The sector simply appears to be trading sideways, consolidating recent sharp gains. Yesterday’s lower volume versus the preceding higher one, sends a bullish message as buyers appear in droves when prices get lower.

Just as the tech sector, healthcare (XLV ETF) also supports the prospect of more gains to come. It’s been knocking on the door of April and May highs, and an upside breakout of the recent trading range is only a matter of time in my opinion.

The price action in the financials (XLF ETF) also follows a bullish path. We’ve seen volume rise during last three sessions, and yesterday’s session gives an impression of verification of the breakout above the April highs as the sector is consolidating recent gains.

The volume differential that favors the bulls is even more pronounced in the consumer discretionaries (XLY ETF). Real estate (XLRE ETF) for example, just extended its recent gains yesterday, disregarding the move lower in the index.

It has been only the leading ratios that suffered pronounced setbacks yesterday, as consumer discretionaries to staples (XLY:XLP) challenged their Wednesday’s intraday lows, and financials to utilities (XLF:XLU) moved below them already. But we haven’t seen what mathematicians would call an inflection point yet. In other words, it’s likely we’ll see both ratios stabilize and support the move higher in stocks next.

As for the stealth bull market trio, materials (XLB ETF) outperformed both energy (XLE ETF) and industrials (XLI ETF) as the latter two closed down – but again, on lower volume than during the preceding up days. Overall, this bull market trio still favors the stock upswing to continue.

Summary

Summing up, yesterday’s late-day reversal didn’t likely mark a call to start selling lock, stock and barrel everything in sight. Conversely, it appears to be a part of the ongoing consolidation that keeps resulting in higher highs and higher lows. As today is the last trading day of the week and month, the closing prices are of key importance for the timing of the anticipated challenge of the early March highs. While the credit market and sectoral analysis favor the stock upswing to continue, yesterday’s weak performance of the Russell 2000 (IWM ETF) is a short-term watchout. The balance of risks is skewed to the upside over the coming weeks though.

I expect stocks to slowly grind higher overall despite the high likelihood of sideways-to-slightly-down trading over the summer – but we’re nowhere near the start thereof. Right now, the breakout above the three key resistances (the 61.8% Fibonacci retracement, the upper border of the early March gap, and the 200-day moving average) is still unfolding with the bears running for cover and FOMO (fear of missing out) back in vogue. In short, the ball remains in the bulls’ court to show us what they’re made of. Will the weekly and monthly closing prices later today still lean in the bulls’ favor on higher timeframes? I would cautiously say so.

Last but not least, we’ll hear Powell speak later today, and Trump will focus on China. When the latter has been announced, it marked the start of the heavy S&P 500 selling 45 minutes before the closing bell yesterday. As tensions have been rising, the short-term direction in stocks very much depends on the overall balance of President’s announcement as regards Hong Kong, the Uyghur bill, coronavirus, the China-India border and foremost the trade deal. We’ll monitor and act accordingly on the unfolding developments.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

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 he 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.

 

As Said, the S&P 500 Grind Higher Goes On

Yesterday’s sizable bullish gap immediately came under attack by the sellers – no panicking though as I kept riding the bull to the glorious close and beyond. In such moments, it’s key to focus on what has changed, and what has not. The obvious conclusion has been that we have seen nothing really new under the sun.

So, will the sizable open profits keep growing further? In my humble opinion, it’s virtually guaranteed.

S&P 500 in the Short-Run

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

The bears went on the offensive right after the bullish open, but the bulls responded as anticipated, and the high daily volume reveals the extent of the buying pressure. Yes, the initiative appears to be firmly with the bulls, but why exactly have I said that the buyers responded as anticipated?

Yesterday’s intraday Stock Trading Alert provides the answer:

(…) However unpleasant it might be to see the bullish opening gap closed, the key point to highlight is that the high yield corporate bonds (HYG ETF) hasn’t really declined below yesterday’s closing prices.

Such a move has been rejected, and the ETF now trades at $82 – and I expect stocks to at least timidly follow up higher later today, and more vigorously over the coming sessions.

What we have seen right after the open, was probably a US-China tensions driven onset of selling pressure – an event of fleeting nature as the ensuing price action showed.

And stocks caught up still yesterday, reversing powerfully higher. To illustrate the extent of the bullish turn, let’s check the market breadth indicators.

It hasn’t been only the advance-decline volume that just flipped profoundly bullish. The advance-decline line has been showing where the odds in the battle to overcome the 61.8% Fibonacci retracement and other resistances lie – with the bulls. The bullish percent index is also solidly back supporting the buyers these days.

Let’s check yesterday’s action in the credit markets next.

The Credit Markets’ Point of View

High yield corporate bonds (HYG ETF) stood the ground and refused to move below yesterday’s closing prices. The uptrend in junk corporate bonds goes on, supporting higher stock prices. While a consolidation of recent sharp gains wouldn’t come as a surprise, we could have seen one yesterday already. And even if not, this leading metric of credit market health is still primed to go higher and serve as a tailwind for stocks over the coming days and weeks.

The above chart shows that both key credit market ratios, the high yield corporate bonds to short-term Treasuries (HYG:SHY) and the investment grade corporate bonds to longer-dated Treasuries (LQD:IEI), confirm each other’s upswings. Such a lockstep move doesn’t reveal any cracks in the stock market bull run.

Key S&P 500 Sectors and Ratios in Focus

Technology (XLK ETF) reversed all intraday losses, and rose on high volume yesterday. The sizable lower shadow underscores the buying interest, boding well for higher prices of the sectoral ETF. And as tech leads the stock market itself, the bullish takeaway is valid also for the S&P 500.

The intraday bullish reversal was mirrored in healthcare (XLV ETF) as well, supporting prospects of more gains to come. And the same goes for financials (XLF ETF) and consumer discretionaries (XLY ETF) too. The key sectors are aligned for more gains ahead, and quite likely shortly.

Among the leading ratios, financials to utilities (XLF:XLU) has indeed broken above the declining resistance line formed by its April highs (and also above those highs themselves) – just as I expected it to. The bullish picture is made complete by the consumer discretionaries to staples ratio (XLY:XLP) that has refused to turn south, and continues to trade within spitting distance of its recent highs.

As for the stealth bull market trio, all three – energy (XLE ETF), materials (XLB ETF) and industrials (XLI ETF) – refused to decline yesterday. That’s a uniformly bullish sign, with the materials and industrials having led the move higher on the day.

Summary

Summing up, yesterday’s selling didn’t stick, and the buyers predictably took over the reins. Less and less in terms of resistances is standing in the bulls’ way and the challenge of the early March highs is slowly but surely drawing nearer. Both the credit market and sectoral analysis favor this bullish takeaway. So does the Russell 2000 upswing as the smallcaps have reversed higher just as powerfully as the S&P 500 did.

I expect stocks to slowly grind higher overall despite the high likelihood of sideways-to-slightly-down trading over the summer – but we’re nowhere near the start thereof. Right now, the breakout above the three key resistances (the 61.8% Fibonacci retracement, the upper border of the early March gap, and the 200-day moving average) is still unfolding with the bears running for cover and FOMO (fear of missing out) back in vogue. In short, the ball remains in the bulls’ court.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

* * * * *

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 he 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.

 

S&P 500 Grind Higher Goes On, Regardless of Daily Setbacks

The runup to yesterday’s US open and the regular session’s trading confirmed my call that stocks would break above the key resistances. And they did effortlessly overcome the upper border of March’s gap and the 61.8% Fibonacci retracement without really looking back. Now that they trade also above the 200-day moving average, how far can the bull run reach?

S&P 500 in the Short-Term

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

A resoundingly higher open followed by more buying before running out of steam 30 minutes before the closing bell – that’s a fair characterization of yesterday’s session. As it happened on reasonably high volume and the candle’s shape isn’t that of a profound reversal, the implications are bullish for the days to come.

It’s been only the 200-day moving average that provided resistance to stocks yesterday, and while the sizable upper knot isn’t a pleasant sight to see for the bulls, it will likely turn out to be a soon-forgotten mark in the slow grind higher that I expect to play out over the coming weeks. The best the bears can hope for in my opinion, would be a sideways digestion of recent gains.

That’s because yesterday’s session shows that the buying power is there, and the sellers haven’t been able to bring prices down much.

See this quote from yesterday’s intraday Stock Trading Alert:

(…) Stocks are consolidating the sizable gains since Friday’s closing bell, and it’s accompanied by higher high yield corporate bond values.

Up till now, the S&P 500 consolidation is taking shape of a shallow sideways trading range … The current price action appears to be a case of back-and-forth trading only, as we see no signs of an impending reversal to the downside to act upon.

Technology is having one of its weaker days today so far, while healthcare is still range-bound and financials are steeply higher. Neither real estate or consumer discretionaries are disappointing, and the stealth bull market trio (energy, materials, industrials) is higher too.

Would the credit markets’ closing prices still confirm the bullish take on stocks?

The Credit Markets’ Point of View

High yield corporate debt (HYG ETF) predictably opened higher yesterday, but just couldn’t keep the intraday gains. On the other hand though, the bears didn’t get their way either. On respectable volume, junk corporate bonds closed little changed from where they started the day, which means that we’ve most likely seen a daily consolidation only.

While further consolidation of recent sharp gains wouldn’t come as a surprise, I think it’s more probable that the bullish bias will prevail over the coming sessions, and that this leading metric of credit market health would go on to serve as a tailwind for stocks.

No material change here either – the moves in stocks and the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) continue to be moving in lockstep. Crucially for the stock bulls, this gauge of bullish spirits remains on their side. Simply put, the setback stock bulls suffered in the last 30 minutes of yesterday’s regular session, is nothing the sellers could call home about.

The ratio of investment grade corporate bonds to long-dated Treasuries (LQD:IEI) also shows no divergence when compared to the HYG:SHY ratio. It means that we’re in a risk-on environment and the riskier HYG:SHY ratio is firmly in the driver’s seat.

Key S&P 500 Sectors in Focus

Technology (XLK ETF) was rejected at the gates of the upper border of the late-February bearish gap, declining powerfully in the last 30 minutes of the regular session. The volume was elevated, but nowhere representative of a real reversal that’s about to stick. That makes me think any potential follow-through will be readily absorbed by the buyers, and we’re likely to see yesterday’s open overcome before too long.

Healthcare (XLV ETF) brought us another long red candle, but on relatively lower volume – and that means even smaller bearish short-term implications than could be the case for technology. In other words, I expect a return of the buyers in both of these key sectoral ETFs pretty soon.

Financials (XLF ETF) have been the star heavyweight performer of yesterday’s session, coming within spitting distance of both April local tops. Financials rose on outstanding volume, and kept half of their intraday gains, which makes the outlook for coming days bullish.

So, we see the three sectors positioned for more gains, would the rest of the crowd agree?

Consumer discretionaries (XLY ETF) certainly would as they kept much of their opening gains intact, unlike technology. Real estate (XLRE ETF) also showed up strongly.

As for the stealth bull market trio, all three – energy (XLE ETF), materials (XLB ETF) and industrials (XLI ETF) – moved higher, with the industrials leading the pack. That’s a bullish combination, boding well for stocks over the coming weeks.

Summary

Summing up, yesterday’s session brought us powerful follow-through buying and less and less in terms of resistances is standing in the bulls’ way. The 61.8% Fibonacci retracement and the early March gap are history, and soon will also be the resistance provided by the 200-day moving average. Both the credit market and sectoral analysis favor this bullish takeaway. So does the Russell 2000 upswing as stocks ignore the rising US-China tensions, and instead focus on a new 1 trillion euro stimulus package across the Pond. The lasting move above the 200-day moving average would be for starters only, as I expect stocks to slowly grind higher overall despite the high likelihood of sideways-to-slightly-down trading over the summer. But before that, the ball remains in the bulls’ court.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

For a look at all of today’s economic events, check out our economic calendar.

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits: Analysis. Care. Profits.

* * * * *

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 he 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.

 

Stock Market Analysis: The Bulls Took Over the Reins, Again

Stocks versus key resistances – that’ how much of last week’s trading could be characterized. Yet the bullish bias has been easily noticeable as prices kept making higher highs and higher lows on a daily basis. As a cherry on Friday’s trading cake, the S&P 500 predictably shook off the Hong Kong-driven rise in US-China tensions. Will stocks confirm our analysis and break above the upper border of March’s gap and the 61.8% Fibonacci retracement shortly?

Judging by the case we lay out next, it’s probable.

S&P 500 in the Medium- and Short-Run

We’ll start this week’s flagship Stock Trading Alert with the weekly chart (charts courtesy of http://stockcharts.com ):

After last week’s attempt to reverse to the downside, stocks continued to reject lower prices in Monday’s premarket session, resulting in a bullish opening gap. And the S&P 500 hasn’t really looked back since, moving two steps ahead, one step backwards throughout the week.

Knocking on the two key resistances reinforcing each other, it still managed to overcome the lower one, the 61.8% Fibonacci retracement. For how long will the upper one, the early March bearish gap stand?

While the weekly volume was largely neutral in its implications, the indicators don’t stand in the way of further gains – but as they’re not trending strongly either, we’ll have to look for more clues on the daily chart.

The daily chart clearly shows stocks cutting into the combined resistance posed by the early March gap and the 61.8% Fibonacci retracement. Friday’s upswing means that the index finished the week back above the latter one.

This is what we’ve written in our Friday’s Alert:

(…) this week’s daily downswings were only able to achieve higher lows. It means that it’s two steps forward, one step backwards for the stock bulls.

Apart from the Hong Kong jitters, there hasn’t been any other catalyst or development that would prompt the markets to reassess the risks. While it’s true that there needn’t be a catalyst, the overnight move lower appears of limited shelf life. Flash in the pan, in other words. The chart posture remains bullish, and we see it likely that the buyers would take on the 200-day moving average (that’s around 3000) before too long.

Yesterday’s volume doesn’t mark a reversal either, and the daily indicators keep supporting the unfolding upleg. When will more buyers jump onboard? Once they do, we expect FOMO (fear of missing out) to become dominant over the wait-and-see approach of this extended consolidation.

Yes, it proved to be a consolidation, because no matter how bearish or bullish the indications for a move either way, stocks kept frustrating both the buyers and sellers equally. As a rollover to the downside never came, the chart pressure to move higher keeps building with each passing day and week, in our opinion.

Friday’s higher close happened on lower volume, and didn’t affect the daily indicators greatly. Regardless, price risks continue being skewed to the upside.

Would the credit markets confirm our bullish take on stocks?

The Credit Markets’ Point of View

High yield corporate debt (HYG ETF) moved higher yesterday, but the daily volume is no reason to celebrate. Consolidation of recent sharp gains wouldn’t come as a surprise, but this leading metric of credit market health is still primed to go higher and serve as a tailwind for stocks.

The moves in stocks and the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) continue to be moving in lockstep. Crucially for the stock bulls, this gauge of bullish spirits remains on their side.

The same can be said about the ratio of investment grade corporate bonds to long-dated Treasuries (LQD:IEI). There is no divergence when compared to the previous HYG:SHY ratio.

The ratio of stocks to Treasuries, the S&P 500 to 10-year Treasuries ratio (SPX:UST), paints the struggle of stocks to break higher. As it continues to trade within sight of recent highs amid still bullish indicators, it favors another S&P 500 upswing.

Key S&P 500 Sectors and Ratios in Focus

These were the thoughts we posted in the intraday Stock Trading Alert less than two hours before Friday’s session close:

(…) While the S&P 500 didn’t make much progress so far, it’s the performance of high yield corporate bonds that supports more gains downs the road – and it doesn’t all that much matter whether they come still today, or whether stocks catch up vigorously during Monday’s premarket session / just thereafter.

The key development among the heavyweight sectors (tech, healthcare and financials) is that they’re refusing to budge and decline today.

Let’s examine their performance looking at the closing prices.

Indeed, technology (XLK ETF) refused to move lower, validating our earlier thoughts. It appears that a shallow correction is all there has been to it, and that the uptrend can go on and close the late February gap as it would challenge the February highs next.

Healthcare (XLV ETF) also refused to sell off any deeper. Given the swing structure seen, we expect the sector to eventually break higher from its sideways trading range.

While the HYG ETF closed higher on Friday, financials (XLF ETF) merely refused to decline. Given the posture of the daily indicators and the low volume of Friday’s trading, that’s no cause for concern – while more sideways trading can go on in the short term, the sector remains likely to challenge its April highs and overcome them.

Once again, consumer discretionaries (XLY ETF) refused to move lower while the consumer staples (XLP ETF) slightly gained. However, the consumer discretionaries to staples ratio (XLY:XLP) continues to trade within spitting distance to its recent highs. These were our Thursday’s thoughts about the move’s importance as the ratio:

(…) is already trading well above its February highs. Given the degree of real economy destruction seen around, that’s quite a signal this leading indicator is sending. The financials to utilities ratio (XLF:XLU) looks to have stabilized not too far from the declining resistance line connecting its mid-March and early-May intraday tops, and it’s our opinion that it would go on to break higher.

The XLF:XLU ratio erased its intraday decline on Friday, and continues to trade sideways for now. While it didn’t break above the declining resistance line yet, we expect it to overcome it eventually.

As for the stealth bull market trio, all three – energy (XLE ETF), materials (XLB ETF) and industrials (XLI ETF) – refused to decline any more intraday. And the sellers weren’t really on the trading floor as it didn’t take much buying power to rebuff the meek attempt. While that’s a bullish sign in general, let’s explore specifically sector-by-sector.

Looking at the closing prices only, energy suffered a daily setback. But it is far from rolling over to the downside, and we expect it to keep on consolidating with a bullish bias.

The materials’ chart is in a stronger technical posture, having come closer to its all-time highs, and having closed the early March gap already. It certainly appears more gains are on the horizon – especially considering the low volume of Friday’s downswing.

It’s also among the industrials that we see base building for an eventual launch higher. Yes, that’s keeps being true despite the lower low made recently in this sector, or retesting it in materials – an overshoot can come before the market moves in its true direction. And just as with the S&P 500 breaking below the 50% Fibonacci retracement not too long ago, we see that in the stealth bull trio too.

Summary

Summing up, Thursday’s decline didn’t land in good company of Friday as stocks refused to decline, and actually reverted back above the 61.8% Fibonacci retracement. Another attempt to close the early March gap is supported by the daily indicators, and we expect stocks to break above both formidable resistances on a lasting basis. Both the credit market and sectoral strength examination favor this conclusion. Thereafter, the bulls would target the 200-day moving average at around 3000. That’s for starters, as we expect to slowly grind higher overall despite the high likelihood of sideways-to-slightly-down trading over the summer. But before that, the ball remains in the bulls’ court.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

For a look at all of today’s economic events, check out our economic calendar.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

S&P 500 Analysis: Yesterday Was Supposed To Be a Reversal, Right?

Stocks have closed between two strong resistances yesterday – between the upper border of March’s gap and the 61.8% Fibonacci retracement. But the overnight rise in US-China tensions (this time, regarding Hong Kong), sent the S&P 500 futures below the key Fibonacci retracement. Can stocks recover and finish the job of breaking higher?

While it may not happen today, it’s nonetheless still likely in the near future.

S&P 500 in the Short-Run

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

Stocks are increasingly cutting into the combined resistance posed by the early March gap and the 61.8% Fibonacci retracement, and this week’s daily downswings were only able to achieve higher lows. It means that it’s two steps forward, one step backwards for the stock bulls.

Apart from the Hong Kong jitters, there hasn’t been any other catalyst or development that would prompt the markets to reassess the risks. While it’s true that there needn’t be a catalyst, the overnight move lower appears of limited shelf life. Flash in the pan, in other words. The chart posture remains bullish, and we see it likely that the buyers would take on the 200-day moving average (that’s around 3000) before too long.

Yesterday’s volume doesn’t mark a reversal either, and the daily indicators keep supporting the unfolding upleg. When will more buyers jump onboard? Once they do, we expect FOMO (fear of missing out) to become dominant over the wait-and-see approach of this extended consolidation.

Yes, it proved to be a consolidation, because no matter how bearish or bullish the indications for a move either way, stocks kept frustrating both the buyers and sellers equally. As a rollover to the downside never came, the chart pressure to move higher keeps building with each passing day and week, in our opinion.

The Credit Markets’ Point of View

High yield corporate debt (HYG ETF) didn’t really move lower yesterday, and the daily volume hints at merely a daily consolidation of recent gains. This leading metric of credit market health is primed to go higher, and serve as a tailwind for stocks.

Yesterday’s pullback in stocks appears no cause of concern, as it’s just a short-term breather during the daily consolidation in the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY).

Key S&P 500 Sectors and Ratios in Focus

Yesterday’s sizable red candle lacked volume to make it stand out, which is why we think it’s just a daily event. Once it plays out entirely, tech will likely move higher again, pulling the index along.

Healthcare (XLV ETF) would be an unlikely ally in the stock upswing resumption. Actually, that was a quip – it wouldn’t be at all unlikely and definitely not out of the blue. The slight increase in yesterday’s volume coupled with half of intraday losses being erased, speaks in favor of higher values not too far ahead.

Alongside the HYG ETF, financials (XLF ETF) held steady yesterday, and the decreasing volume together with the daily indicators’ posture (they haven’t rolled over to the downside) favors the move higher to continue, and break above the early May highs.

Once again, consumer discretionaries (XLY ETF) refused to move lower while the consumer staples (XLP ETF) declined. The predictable result is another move higher in the consumer discretionaries to staples ratio (XLY:XLP). These were our yesterday’s thoughts about the importance as it:

(…) is already trading well above its February highs. Given the degree of real economy destruction seen around, that’s quite a signal this leading indicator is sending. The financials to utilities ratio (XLF:XLU) looks to have stabilized not too far from the declining resistance line connecting its mid-March and early-May intraday tops, and it’s our opinion that it would go on to break higher.

The XLF:XLU ratio probed the above-mentioned declining resistance line. While it didn’t break higher yet, it didn’t decline either. Our expectations for it to break higher remain intact.

Among the stealth bull market trio, there was no breakthrough either way yesterday. Energy (XLE ETF) moved lower, but didn’t give up this week’s gains. Neither did materials (XLB ETF). Comparatively, industrials (XLI ETF) performed best. Overall, that marks consolidation of recent gains, and building a base for an eventual launch higher across these sectors. Yes, that’s true despite the lower low made last week in industrials, or retesting it in materials.

Summary

Summing up, yesterday’s decline doesn’t pose an obstacle for the bullish outlook for the S&P 500. Its overnight part being headline-driven would likely be of limited lasting power, and we expect stocks to break above both formidable resistances on a lasting basis. Yes, the 61.8% Fibonacci retracement breakout will likely be confirmed, and so will the upper border of the early March gap. Both the credit market and sectoral strength examination supports this conclusion. Thereafter, the bulls would target the 200-day moving average at around 3000. That’s for starters, as we expect to slowly grind higher overall despite the high likelihood of sideways-to-slightly-down trading over the summer. But before that, the ball remains in the bulls’ court.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

This Key Resistance Breakout Is Where the Rubber Meets the Road

Tuesday’s refusal of the stock upswing didn’t really stick, and the S&P 500 opened higher. Trading with an upward bias during the session, the index closed comfortably above the 61.8% Fibonacci retracement. As outlandish as it might seem, does it denote a new bull market being on the way? It just can’t be overstated how crucial this level is to the stock market outlook…

S&P 500 in the Short-Run

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

Cutting into the 61.8% Fibonacci retracement several times already, stocks are on a slow but steady move this week. It’s as well the early March gap that they’re challenging. While the S&P 500 just closed above the Fibonacci retracement (that’s around 2940), the gap’s upper border stands still unbeaten.

Yesterday’s volume doesn’t mark a spike where the buyers would be falling over themselves to enter into the market, but it’s not representative of a reversal either (thanks to closing relatively near the intraday highs). It’s just on the lower end of the average spectrum, which would be consistent with a gradual upswing development. Is it that neither the buyers nor the sellers believe it? By believe, we mean to be ready to get into the market in droves, in place of a wait-and-see position.

The daily indicators keep supporting the unfolding upleg. Will they convince more buyers to enter the fray with passing time? As we see the grind higher in fits and starts as the most likely scenario, it’s probable.

The Credit Markets’ Point of View

High yield corporate debt (HYG ETF) keeps providing tailwind for the move higher in stocks. On sizable volume and near its intraday highs, this leading metric of credit market health overcame the late April and early May highs. With its daily indicators supporting further gains, how does the broad credit market performance reflect upon the stock advance?

Stocks aren’t getting ahead of themselves. The high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) keeps being in accord with the march north in the overlaid S&P 500 chart (the black line).

Key S&P 500 Sectors and Ratios in Focus

To illustrate the point, have you seen how easily technology (XLK ETF) overcame Tuesday’s daily setback? In our yesterday’s analysis, we noted that the daily reversal lower on a not so outstanding volume means that the uptrend is intact. And it is.

Healthcare (XLV ETF) couldn’t keep its opening gains yesterday, and remains very much range-bound. Financials (XLF ETF) gave up their intraday gains, but their bullish opening gap remains intact as they’re knocking on the door of the early May highs in an attempt to overcome them.

Consumer discretionaries (XLY ETF) refused to close its opening bullish gap, and instead consolidated sizable opening gains. While consumer staples (XLP ETF) rose as well, they relatively underperformed the discretionaries.

As a result, believe it or not, the consumer discretionaries to staples ratio (XLY:XLP) is already trading well above its February highs. Given the degree of real economy destruction seen around, that’s quite a signal this leading indicator is sending. The financials to utilities ratio (XLF:XLU) looks to have stabilized not too far from the declining resistance line connecting its mid-March and early-May intraday tops, and it’s our opinion that it would go on to break higher.

Among the stealth bull market trio, energy (XLE ETF) performed best. Together with materials (XLB ETF) and industrials (XLI ETF) though, they’ve been largely consolidating last two days’ gains. Consolidating with a bullish bias, that is – and that bodes well for the stock rally to continue at its own pace.

From the Readers’ Mailbag

Q: I switched jobs and was in the process of moving my 401k directly from one company to another. The old company sent a paper check to me cashed out on March 12th..a low point. I have to put the check into my new 401k account. waited for market to go back down but never happened. Now i will be buying higher than sold. I have the check to the 401k company FBO myself -What are my options if any?

A: Let me give you an answer that doesn’t constitute any tax accounting or similar advice, and concentrates instead on the stock market situation at hand, and how I would approach the matter were I in your shoes.

First things first – it’s not a shame to buy higher, if the outlook is correspondingly bullish. You’re assessing the outlook, and not a price point by itself.

Off the all-time February highs, stocks dived to the March 23 lows. The recovery has been similarly steep, and eventually overcame the resistance posed by the 38.2% Fibonacci retracement in early April. All right, but should the bear market be alive and well still at that time, stocks should have very real trouble overcoming the 50% Fibonacci retracement.

And they did have issues, and it was only last week that they refused to plunge below it again. So, they kind of left the glass half full, half empty. That would give a big-picture impression of possible, yet not outrageously large gains ahead, or just muddling through directionless for some time.

Now, we see stocks taking on the 61.8% Fibonacci retracement, in what would mark a transition to a stock bull market. And it stands a pretty good chance of coming true, regardless of all the suffering in the real economy. This is a third attempt to overcome this key resistance, so it again speaks of a thorny road ahead. Thorny, but mostly higher on low volatility compared to Q1– and as we expect the breakout to succeed, it would attract new institutional money alongside more retail investors. Not that the latter wouldn’t be coming already (money market outflows show that).

One more point in support of the new bull market theory and against retesting or breaking below the March lows. If you look at similar post WWII situations in stocks, and see how the S&P 500 performed since reaching the 50% Fibonacci retracement average, the current situation, despite all the corona facts, hysteria and tidal wave of bankruptcies ahead, is taken as no big deal. I mean, stocks are pretty much following the average case scenario.

And that’s a steady climb higher at a not too steep a pace. By not too steep, I mean almost a straight line pointing to stocks around 3050 quite before the Labor Day. Right now, stocks are fairly reasonably priced, and it should be noted that even the worst case scenario would take them only to the low 2600s during the summer. That’s not such a large downside that stocks could suffer if you consider the real world as seen through your very own eyes.

That’s how I see the table set for the upcoming weeks. Of course, the runup to the elections and the possible arrival in earnest of the second corona wave would decide whether stocks go on to march higher (quite possibly faster than before considering the great uncertainty removed), or point lower next. Either way, we would get plenty of advance warnings – the current situation simply requires chart reading, methodology and being attuned to the fundamental developments and interventions, all on a daily basis.

Now comes the being in your place part. I would either look for overshoots to the downside from the ideal path forward in stocks over the summer, and allocate capital to buy when we get temporary discounts. Yes, that means disregarding the fact that financial markets are the only place where buyers run out of the store screaming in fear whenever a discount presents itself.

Or I would just go the dollar-cost-averaging path, meaning I would allocate a certain portion of the funds to place at steady intervals over time in what is essentially giving up on trying to time the market. Both attempts have their pros and cons, and it’s essentially about the time and emotional capital you want to invest…

What is not part of your question, but still needs to be answered in one breath, is where I would allocate those funds. Then, there is the distant time horizon of a 401(k).

While we can count on financial repression to go on and keep yields relatively low, remember that during the 1980s, Treasuries were jokingly called certificates of guaranteed confiscation. Given the inflationary clouds ahead, you’d stand a better chance in Treasury inflation-protected-securities (TIPS), laddered bond portfolio of your own making (yes, buying individual bonds and keeping them till maturity), or even going for dividend aristocrats (these are stocks with decades-old history of paying out dividends and raising them constantly along the way – these are your Coca Colas or Procter & Gambles and the like).

Heck, even some technology stocks behave in a way that can be similarly taken advantage of. I personally view the Microsoft or Apple charts as bullish – and this is just two of the many greatly-performing tech stocks. The tech sector is primed for more gains, and healthcare is too – these heavyweights have the brightest prospects in 2020.

The above shows the vulnerability of having to cash out of the market at an inopportune time. That messes up with lifetime planning (just as the two bear markets in 2000s did), and the above thoughts represent my top of mind ideas to deal with it gracefully.

Summary

Summing up, Tuesday’s decline was erased before the market open already, and the S&P 500 had kept the bullish intraday bias since. But this isn’t about such a short time frame only – both the credit market performance and sectoral analysis keep pointing in the direction of more stock gains to come. The bulls’ first objective is to confirm the breakout above the 61.8% Fibonacci retracement by three consecutive closes higher, and to overcome the early March bearish gap (its upper border is at around 2970) in a show of strength. Thereafter, the bulls would target the 200-day moving average at around 3000. That’s for starters, as we expect to slowly grind higher overall despite the high likelihood of sideways-to-slightly-down trading over the summer. But before that, the ball remains in the bulls’ court.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

Should We Really Be Concerned By Yesterday’s S&P 500 Pullback?

Despite yesterday’s bearish opening gap, the bulls closed it, taking prices higher in a very measured and cautious way. Then, the bears took over the reins and drove the index well below the levels at the start of the day. Have we seen a reversal?

In short, that’s very unlikely – and not only because of the low volume of yesterday’s downswing…

S&P 500 in the Short-Run

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

The much anticipated Powell testimony, along with Treasury Secretary Mnuchin, was treated by the market place as a non-event. Stocks recovered from the initial setback, and it was only the final 75 minutes of trading that took them down. While the slide may have looked impressive given the low intraday volatility, has it achieved anything lasting and of importance?

Both the volume and daily price action examination hint at merely a consolidation in an unfolding upleg. Stochastics is still on its buy signal, the CCI in the uptrend territory, and we better not read too much into the RSI curling lower. On balance, the daily indicators are supporting the bullish case and another breakout attempt over the 61.8% Fibonacci retracement. Metaphorically speaking, stocks are like a coiled spring now.

The importance of overcoming this resistance can’t be overstated for the institutional investors. With the rise of passive investing we’ve seen over the decade (yes, it had more assets under management than active investing for a good few years already), how much new buying will it bring in as the resistance is overcome? In our opinion, just enough to put a good floor below stocks. A market-based one, this time. And the examination of money flows from the money market funds supports that conclusion too, because last week’s pullback was heavily bought.

But last week, it were the credit markets, that were profoundly lagging and flashing caution. What about now, have they sold off during yesterday’s stock pullback?

The Credit Markets’ Point of View

Absolutely not. High yield corporate debt (HYG ETF) kept its opening gains, and merely gave up some intraday ones. That’s a short-term sign of outperformance, meaning the stock bulls have the wind in their sails.

Just as with stocks, yesterday’s HYG ETF upswing happened on low volume, hinting that this hasn’t been the real deal yet. It’s likely just a consolidation before another corporate junk bonds upleg, in our opinion.

The high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) also confirms our view that yesterday’s shallow pullback in the overlaid S&P 500 chart (the black line), has been no game changer.

Key S&P 500 Sectors in Focus

Technology (XLK ETF) gave up its intraday gains, and reversed lower on a not so outstanding volume. In other words, its uptrend is intact – just look at the volume around last week’s lows compared to previous two days’ one. While the accumulation at the lows hadn’t been above the volume of Wednesday’s plunge, it has still been more pronounced than the distribution just seen. Coupled with the daily indicators’ posture, that’s another reason for why the march north will likely go on.

Healthcare (XLV ETF) declined yesterday, but remains pretty much range-bound. Financials (XLF ETF) also moved lower yesterday, but its indicators support another move higher as the sector appears getting ready to move clearly above the midpoint of its April range.

Despite the ominous daily reversal candle with sizable upper knot seen in the consumer discretionaries (XLY ETF), the sector didn’t decline on outrageous volume. In other words, its move is consistent with merely a daily setback suffered. Importantly, it outperformed its defensive counterpart, the consumer staples (XLP ETF), which declined on the day – just as utilities (XLU ETF) did.

Among the stealth bull market trio, both energy (XLE ETF) and materials (XLB ETF) gave up most of their Monday’s gains, with industrials (XLI ETF) holding up best. The volumes behind yesterday’s declines within these three sectors don’t mark a reversal either. Again, it’s consistent with only a daily setback seen.

By the way, not even on yesterday’s housing data coming in below expectations (yes, we mean the key ones – the actual housing starts), the real estate sector (XLRE ETF) didn’t sell off dramatically. Its performance actually mirrors that of the financials, which shouldn’t really be all that surprising.

From the Readers’ Mailbag

Q: Do you think the “real economy bottom” is at hand?  With 20% unemployment, massive debt, multiple small business failures, and a still raging virus, I would question that perception.

A: Well, if you count those who (almost magically) dropped out of the workforce, we’re well over 20% unemployment. New jobless claims are one part of the story, but the continuing unemployment claims are more important. Sure, if you look around and see the retail sales, they are out of a horror show. But company earnings (prospects) have slowly started to turn the corner already.

Sure, the brick-and-mortar retail sector is suffering and among many other household names, JC Penney filed for bankruptcy. But please remember that these are beached whales that have been massively overbuilding well before the great financial crisis struck. The US simply has the most square feet per capita in the world, so the coronapocalypse is the straw that’s breaking the camel’s back here. Among the destruction though, creativity and online solutions in the sector abound – we’re not looking at Amazon (AMZN) here.

But I agree that small business, the backbone of US economy, is suffering, and unfortunately will continue to do so. With the way the S&P 500 is structured (the weighting of the behemoths and importance of foreign sales especially should the dollar roll over – in my humble opinion, it will later this year), the index can continue higher still though, and probably more vigorously than the Russell 2000 (IWM ETF).

I also agree that we’re in the ebbing stage of the virus, and the risk of a second wave is still very much there – regardless of the relative complacency that rules the day.

But still, the market perception, its discounting mechanism, is what counts. And the S&P 500 is very much willing to bridge the valley. Remember early April when Fauci was talking lockdown here, there, everywhere? The index obliged lower but just couldn’t decline any more for several days, while we still saw the exponential rise in infections and were waiting for another shoe to drop. It didn’t happen, and unless we see the June data (continuing unemployment claims, participation rate, retail, manufacturing and the like) coming in lower than those of May, the stock market is unlikely to sell off more than a couple of percent and enter a bear market territory (which is defined by a more than 20% decline).

Also, the sentiment data don’t favor a really deep downswing – there are just too many bears out there. The forward-looking volatility measure, the VIX, also supports the stock upswing to continue, as its increases are associated mostly with stock selloffs. That’s because stocks usually decline faster than they rise (we saw that yesterday on intraday basis). Look at the VIX, it’s been trending lower, making a series of lower highs and lower lows since mid-March.

In closing, the real economy is just one factor in the S&P 500 equation, and you’re right the real economy bottom might not have yet been reached. I agree, this is a mini-depression, and we’re bound to find out what mini actually means in terms of time. Yet, it’s the green shoots (e.g. the slowing pace of manufacturing’s decline – see the Empire State Manufacturing Index) that stocks are acting upon (similarly to how they did in March and April 2009), and we have to deal with the stocks’ perceptions first of all here.

Summary

Summing up, yesterday’s decline into the closing bell didn’t materially change the bullish perspective in stocks or upturn the credit markets. Corporate debt continues being supportive of the stock upswing, and the unfolding breakout (rigorously speaking, it takes preferably three sessions’ closes higher to declare it confirmed) above the 61.8% Fibonacci retracement is likely to succeed this time. Thereafter, the bulls would target the 200-day moving average at around 3000. As outlined on Monday, while we don’t expect a sizable selloff, we don’t see dramatic gains as overly likely either. The best known measure of volatility, VIX, appears to support the bullish view over the coming weeks.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

The Credit Markets Gave Their Nod to the S&P 500 Upswing

Yesterday’s session did away with the non-confirmation of last week’s reversal from the 50% Fibonacci retracement. Junk corporate bonds lent their support to the stock upswing, and the S&P 500 closed above the 61.8% Fibonacci retracement. Will the bulls be strong enough to confirm the breakout, or is a correction next?

S&P 500 in the Short-Run

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

Steadily rising in the runup to the start of the US session, stocks opened with a sizable bullish gap. And they haven’t looked back since, closing on high volume above the key resistance, the 61.8% Fibonacci retracement. Reflecting the upswing, the daily indicators turned largely supportive.

What has happened as far as headlines go? We got another Powell statement, but it didn’t bring materially bullish surprises. Be the judge – he said that the US economy can decline 20-30% amid the pandemic, with the downturn possibly being with us till late 2021. His next remark that the Fed hasn’t exhausted its toolbox isn’t totally new either – it’s only that during his Wednesday’s Peterson Institute webinar, the call for more fiscal measures was the prominent one.

The willingness to reverse and expand the shrank versions of active lending programs, or introduce new ones, appears to be really there. And it didn’t require a more sizable downswing – the breakdown attempt below the 50% Fibonacci retracement was all it took. Fed Chair’s testimony before the Senate Banking Committee is coming later today, with stocks moving down to the low 2940s.

The second piece to the puzzle has been the Moderna (MRNA) early trial vaccine announcement. Despite the study’s focus being safety, and that the composition was actually tested in two low doses on merely 8 patients, the stock market reacted broadly and positively on these interim results. It should be said however, that both the stock itself and the healthcare sector (XLV ETF) as such, have formed sizable black candles, i.e. they gapped higher but gave up large amounts of the opening gains.

These were our yesterday’s intraday observations:

(…) we’re dealing with a sizable bullish gap that makes a move higher later today likely. On the other hand, our expectation as to tomorrow’s Powell testimony remain the same – i.e. a downswing in its wake remains likely.

Chances are, the HYG ETF won’t decline in a bearish attempt to close the gap.

As credit has been underperforming stocks recently, stocks don’t have to spring higher immediately after the HYG ETF overcomes its highs. At the same time, a large part of the rationale for the short position has been taken away with the HYG ETF action so far.

At the same time, buying a breakout attempt doesn’t come without its own set of risks. It’s unconfirmed yet.

In closing, today’s market action so far has given more weight to the bullish case, and our scenario of a slow grind higher still seems most probable.

The bullish gap remains open, supporting the buyers. High yield corporate bonds indeed haven’t declined yesterday, and have caught up with the stock upswing seen on Thursday and Friday. As stocks refused to decline, the slow gring higher over the coming weeks and months got more likely.

The below comments on the S&P 500 prospects expressed in our yesterday’s flagship Stock Trading Alert remain valid also today:

(…) As the coronavirus infection charts appear to have relatively stabilized, and the Fed offered ample support at a critical juncture, the stock market hasn’t sold off in a dramatic way since. Moving from the March 23 lows to the 50% Fibonacci retracement, it has overcome this resistance and taken twice on the 61.8% one. Last week, the 50% retracement held as support.

The above paragraph would speak in favor of a near-term trading range between the two retracements. But would that mean that no selloff below the lower one can happen? Absolutely not, the 2720 or even the low 2600s can get tested. And that needn’t to happen on very adverse corona-related developments. Faced with incoming data, the market can start to doubt whether we’re within sight / we’ve reached the bottom and the real economy is on the mend now. Continuing unemployment claims, retail data, manufacturing figures and similar would show. Or escalation in US-China trade tensions can drive the stock selloff similarly to the way it did early on Friday. Or the Fed playing the monetary interventions on-off game, can work to similar effect.

Still, having gone as high from the low 2200s, the risk of retest or breakdown below these lows, isn’t there at the moment. Not with all the implicit and explicit Fed support, the many fiscal stimulus measures, and crucially, not unless corona goes from we-have-flattened-the-curve to oh-it’s-exponential-again. Despite the relative complacency and the dangers it brings, we’re still far from the market pressing the panic button.

Reaching 2800, 2720 or the low 2600s wouldn’t count as panic. Considering this year’s swings, a move to these levels (especially the first two, but there’s potential for an overshoot to the 2600s) would constitute a relatively shallow correction, after which a slow grind higher could go on (barring catastrophic corona developments). After all, we’re in an election year.

Let’s check yesterday’s key move that happened in the credit markets.

The Credit Markets’ Point of View

High yield corporate debt (HYG ETF) gapped higher, rejected the intraday attempt to move lower, and finished with more gains. The volume on the upswing has been respectable, and the daily indicators paint a bullish picture for the sessions to come.

The high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) now also confirms the overlaid S&P 500 chart’s upswing (the black line). Relatively speaking though, stocks are getting a bit pricey as they’re the asset class leading higher.

Key S&P 500 Sectors in Focus

Technology (XLK ETF) kept its bullish gap open, hesitantly rising during the day on low volume. Healthcare (XLV ETF) erased around two thirds of its bullish gap, while financials (XLF ETF) rose to the midpoint of their April range. It’s been only the consumer discretionaries (XLY ETF) that overcame their recent highs.

Among the stealth bull market trio, both energy (XLE ETF) and materials (XLB ETF) are challenging their local tops, with industrials (XLI ETF) not lagging too far behind. The volumes behind there upswings attest to the unfolding resumption of a push higher, supporting our hypothesis of slow grind higher over the coming months.

Summary

Summing up, yesterday’s upturn in the credit markets dealt with the key remaining obstacle in the prospect of generally higher stock prices. The breakout above the 61.8% Fibonacci retracement stands a chance of being confirmed perhaps as early as this week. The effects of today’s Powell testimony should prove temporary in keeping a lid on stock prices. As outlined, while we don’t expect a sizable selloff, we don’t see dramatic gains as overly likely either. The best known measure of volatility, VIX, appears to support this view. The perceived likelihood of the real economy bottom being at hand, also speaks in favor of the above.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

It’s the Credit Markets Vs. the S&P 500 Upswing Now

Neither on Thursday, nor on Friday did the bears manage to break below the 50% Fibonacci retracement. Stocks rebounded, albeit less convincingly than on Thursday. Or was it convincing enough? Let’s examine both sides of the story to assess whether it’s the bulls or bears that are holding the upper hand now.

S&P 500 in the Medium- and Short-Run

We’ll start this week’s flagship Stock Trading Alert with the weekly chart (charts courtesy of http://stockcharts.com ):

The bulls opened the week, making another run at the 61.8% Fibonacci retracement. Late on Tuesday, the Fed made several pronouncement that were not really surprising, but they still served to take the wind off the bulls’ sails. Namely, it was stated that more fiscal stimulus might be necessary, and that the virus needs to get under control so as to fix the economy. On Wednesday, Powell echoed these kind-of-obvious positions, and stocks sold off to the 50% Fibonacci retracement. On Thursday, they declined on another 3,000K unemployment claims data, yet reversed later in the day. Friday brought us renewed US-China tensions and terrible retail sales figures, which took stocks lower again – yet they recovered in the latter half of the session.

As a result, the weekly candle bears a red body that marks the decline, and a sizable lower knot denoting last two days’ recovery. Neither the weekly volume nor the weekly indicators stand out in any way. Are stocks likely to go on grinding slowly higher, or will the bears try luck again with another downswing attempt?

Let’s see the daily charts for more details.

Trading around the 50% Fibonacci retracement attracted relatively more volume than the breakout attempt above the 61.8% one. As the buyers are certainly becoming more active around the 2800 area, is it likely to hold another selling wave should it come? And how likely will it come?

Well, the daily indicators aren’t exactly on their buy signals just yet – Stochastics is still on a sell signal, while CCI has ticked higher before reaching the -100 area and RSI is fairly neutral.

Let’s dig a bit deeper into Friday’s events and paint a picture of what’s to come early this week. While the Democrat-proposed $3T bill is dead on arrival, it’s fairly obvious there would be a new fiscal stimulus – however, it hasn’t materialized yet even as an outline. Then, after backlash against the implied cure-all coronavirus vaccine position, Trump flip-flopped to say that the virus would just go away at some point, all by itself – which seems to have helped with Friday’s modest upswing.

On Tuesday, we’ll hear Powell’s testimony – and after last week’s reaction to the cautious tone struck, the risks of another selloff are there. It can’t be denied that the authorities have managed to paper over the problem, but is the consumer and small business sector coming back? We’re of the opinion that the nearest months will show the veracity of the rebound, and we suspect that a very wide-stretched U-shaped real economy recovery would actually be the optimistic scenario here.

These weeks, the market will likely remain in a wait-and-see mode, reluctant to make a sizable move either way. But what if the risks were skewed rather to the downside in the very near-term? Coming back to the Fed, it’s likely – after moving decisively in late March and early April, their Treasury/mortgage-backed securities purchases keep being low. That’s one key buyers less. What would be a better excuse to ramp up the printing presses than another slide in the markets?

In other words, it’s unlikely that Powell, after putting pressure on the executive branch to act, would bring the punch bowl to the Senate hearing. This makes it likely that the market would need to spook the Fed into action first.

Do we find support for the above theory in the credit markets?

The Credit Markets’ Point of View

High yield corporate debt (HYG ETF) didn’t really rebound either on Thursday or on Friday. That’s a sign of non-confirmation of the stock upswing.

The high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) also keeps underperforming. Just as we wrote on Thursday, this ratio is well positioned to exert downside pressure on the overlaid S&P 500 chart (the black line), even after Friday’s modest move higher.

Fundamentally speaking, that’s what one can expect when Fed’s firepower isn’t really there at the moment. This is why another attempt to move lower in stocks, is likely.

Key S&P 500 Sectors and Ratios in Focus

Sure, technology (XLK ETF) rebounded on encouraging volume, but the technical picture isn’t fully convincing. The daily indicators still aren‘t on their buy signals, and while the sector keeps making higher highs and higher lows, last two days‘ rebound appears extended and consolidation with a downside bias isn’t out of the question.

Healthcare’s (XLV ETF) price action looks more favorable to the bulls, especially since Friday’s volume overcame that of the Wednesday’s downswing. Unlike tech, the sector didn’t open near its Thursday’s starting prices. But can it keep pulling the S&P 500 higher?

Financials (XLF ETF) continue underperforming, and despite erasing Wednesday’s plunge, they’re not trending higher. They reflect the weak performance of the credit markets, which doesn’t bode well for the advancing index as such.

Energy (XLE ETF) is taking a breather, and has issues moving higher regardless of the oil price recovery. As the volume also leaves quite something to be desired, the short-term risks appear skewed to the downside.

However, that’s not true to such an extent in materials (XLB ETF). On one hand, they rejected the lower low and sprang higher, but the daily indicators and volume aren’t yet on the side of the bulls. While that may change later this week, we’re not there yet, and consolidation over the nearest sessions remains the most likely scenario.

The last of the stealth bull market trio, the industrials (XLI ETF) performed as feebly as energy did. It’s a safe bet to say that these three sectors haven’t exactly assumed leadership in the S&P 500 rebound, making it more likely that the stock bulls will get again tested this week.

The financials to utilities ratio (XLF:XLU) still doesn’t act bullish – the sideways action would favor consolidation in this relatively broad sideways trading range (2800 to 2940) in the S&P 500 – still within the lower half of that spectrum for now.

Similarly, the consumer discretionaries to consumer staples ratio (XLY:XLP) is consolidating. It means that it’s not giving clear signs of the upcoming directional move in stocks.

The Fundamental S&P 500 Outlook

As the coronavirus infection charts appear to have relatively stabilized, and the Fed offered ample support at a critical juncture, the stock market hasn’t sold off in a dramatic way since. Moving from the March 23 lows to the 50% Fibonacci retracement, it has overcome this resistance and taken twice on the 61.8% one. Last week, the 50% retracement held as support.

The above paragraph would speak in favor of a near-term trading range between the two retracements. But would that mean that no selloff below the lower one can happen? Absolutely not, the 2720 or even the low 2600s can get tested. And that needn’t to happen on very adverse corona-related developments. Faced with incoming data, the market can start to doubt whether we’re within sight / we’ve reached the bottom and the real economy is on the mend now. Continuing unemployment claims, retail data, manufacturing figures and similar would show. Or escalation in US-China trade tensions can drive the stock selloff similarly to the way it did early on Friday. Or the Fed playing the monetary interventions on-off game, can work to similar effect.

Still, having gone as high from the low 2200s, the risk of retest or breakdown below these lows, isn’t there at the moment. Not with all the implicit and explicit Fed support, the many fiscal stimulus measures, and crucially, not unless corona goes from we-have-flattened-the-curve to oh-it’s-exponential-again. Despite the relative complacency and the dangers it brings, we’re still far from the market pressing the panic button.

Reaching 2800, 2720 or the low 2600s wouldn’t count as panic. Considering this year’s swings, a move to these levels (especially the first two, but there’s potential for an overshoot to the 2600s) would constitute a relatively shallow correction, after which a slow grind higher could go on (barring catastrophic corona developments). After all, we’re in an election year.

What to do about the current S&P 500 pricing, what actions to take? For all the above-mentioned reasons (namely the credit-related ones), we’re expecting a push lower in stocks to happen most likely over this week, and in all likelihood still within May. With breakouts and breakdowns having failed recently (bringing about no directional move or momentum to trade), the choice of opportune entry and exit points is rising in importance.

Summary

Summing up, despite the bullish finish to Friday’s trading, the buyers don’t have yet the indicators on their side. Weekly ones including volume are mostly neutral, while the daily ones remain vulnerable to a downside move. As the credit markets portend, the stock upswing appears to have gotten a bit ahead of itself, and Tuesday’s Powell testimony coupled with yet another reduction in Fed’s purchases starting today, are likely to be the catalyst of renewed selling. Delivered with a sober assessment of the real economy prospects and uncertainties (yes, the Q2 Fed-projected GDP drop is now 35%), it could drive stocks back to the 2800s, and the HYG ETF breaking below the late April lows. This would strengthen the bearish case for stocks in the near term – just as the US-China trade tensions or anchoring the reopening rebound expectations do.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

Just Who Would Trust Yesterday’s Stock Upswing?

Just when it appeared that the bears will get a third consecutive daily close lower, stocks rebounded from the 50% Fibonacci retracement. Having stabilized and adding to the intraday gains within the final hour before the closing bell, have the sellers been banished now?

That’s unlikely in our view.

S&P 500 in the Short-Run

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

Stocks opened with a bearish gap, going deeper below the 50% Fibonacci retracement. The bulls stepped in though, striving to repair the daily price damage.

This is how we have summarized their efforts some 75 minutes before the closing bell in our latest intraday Stock Trading Alert that day:

(…) The stock bulls continued to push higher, while the corporate junk bonds didn’t confirm the stock advance to such a degree. So, where are the stock advance engines and are they likely to go on firing?

Healthcare (XLV ETF), financials (XLF ETF) and consumer discretionaries (XLY ETF) are among the best performing sectors today – but still, they have only retraced certain parts of their yesterday’s downswing. Technology (XLK ETF) hasn’t managed to do that (Amazon, Microsoft, Apple and Alphabet are not today’s shining stars) while the stealth bull trio (energy, materials and industrials) continue lagging behind in their retracing attempts too.

But the stock index is still attempting to move higher, regardless of not having the key upswing drivers aligned behind the attempt. Smallcaps (IWM ETF) are also performing less than strongly, trading with a sizable upper knot and well below yesterday’s closing prices. This subtly points to the bear takedown risks being still very much present in the market.

Okay, these are the clues for the 500-strong index. But we are trading the index and have to respect its swing structure with the potential overshoots. And it tells us that should stocks (driven by the tech comeback later today) play catch-up and take prices above 2870, the risk of further gains in the lead up to tomorrow’s retail data would be there. That’s true regardless of the incoming data likely to be worthy of a horror show, and the market selling off in its wake.

The mentioned trio (healthcare, financials and consumer discretionaries) have indeed added to their intraday gains in the final hour of trading – during which neither technology (XLK ETF) nor smallcaps (IWM ETF) have exactly outshined them.

Tellingly, our overnight target of 2870 that would have the power to flip the very short-term outlook bullish, hasn’t been reached by a long shot. And as we see the futures having rolled over to trade at around 2820, we’re getting a real-time confirmation of the yesterday-presented bearish outlook for stocks – both in the regular Stock Trading Alert and its intraday follow-ups.

On top, today’s bearish plunge comes in anticipation of the upcoming retail sales figures, providing us with one more hint of which way stocks are likely to trade after the US market open. In short, expect the bears to reappear.

How did the credit markets perform during yesterday’s session exactly?

The Credit Markets’ Point of View

While high yield corporate debt (HYG ETF) refused to go much lower or higher since yesterday’s open, it’s relative stabilization on a daily basis seems to have ignited stocks more than justified. A bridge too far for the stock bulls? Looking at the shape of things, probably.

The high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) also hints at the prevailing bearish overtones. This ratio too is well positioned to exert downside pressure on the overlaid S&P 500 chart (the black line).

Key S&P 500 Sectors and Ratios in Focus

Technology’s volume on the upswing didn’t match or overcome that of the preceding downswing. Is the sector likely to catch up with more upside price action later today? Judged by the daily indicators, that’s unlikely.

The prospect of bearish upcoming performance in the short-term will serve to put pressure on the whole index – just as the performance of the stealth bull market trio will, and healthcare (XLV ETF), consumer discretionaries (XLY ETF) or financials (XLF ETF) can’t be counted on to save the S&P 500’s day.

Materials (XLB ETF) were the strongest ones yesterday, with energy (XLE ETF) and industrials (XLI ETF) lagging behind the attempts to retrace Wednesday’s declines. This doesn’t bode well for the the index as such, and their upcoming opening prices and performance later in the day would likely confirm that.

Yes, financials scored an upswing yesterday, but that didn’t flip the financials to utilities ratio (XLF:XLU) over to bullish. Coupled with its daily indicators‘ posture, this leading ratio maintains its bearish short-term outlook.

And so does the consumer discretionaries to consumer staples ratio (XLY:XLP). After retracing all the downswing since its February highs, this leading metric appears to be rolling over to the downside.

And we fully expect the upcoming retail data to put pressure on yesterday’s star performers, the discretionaries (XLY ETF). There is no other logical conclusion to be made as the V-shaped recovery is increasingly being recognized by the market place for what it truly is – a pipe dream.

 

From the Readers’ Mailbag

Q: the S&P is showing strong support at the 2720 range where you have put the target. However the Dow shows support at 23100 (which was breached today). How do you know which one to go by?

A: Yes, the 2720 area is a meaningful S&P 500 support zone as both the 50-day moving average and the late April lows are located there. The other indices such as Dow Jones Industrial Average or Russell 2000 give us valuable clues, but foremost, we have to focus on the S&P 500 itself.

Applied to the current situation, we see that DJIA rebound yesterday mirrored that of the S&P 500 – also in terms of volume relative to the preceding daily downswing. In latter stages of stock advances (and as the repeated showing at the 61.8% Fibonacci retracement shows, we think that’s a true description of the S&P 500 status), it’s not unusual to see broader-based indices (S&P 500) hold up ground better than the narrower ones (DJIA).

As for smallcaps though, that’s a different story. The Russell 2000 (IWM ETF) hasn’t performed as strongly as the S&P 500 did on the rebound (i.e. the backbone of US economy hasn’t been confirming the advance by leading higher relatively), which is yet another bearish piece to the puzzle. And odds are the unfolding puzzle will be resolved with another downswing before too long.

Summary

Summing up, despite the bullish finish to yesterday’s trading, the buyers don’t appear to be as strong as they project themselves to be. Unless we see a turnaround in the credit markets and renewed vigor among the formerly leading S&P 500 sectors and their ratios, Thursday’s session is likely to mark a temporary reprieve only. Should the HYG ETF break below the late April lows, the bearish case would get a new lease of life. Combining the technical and fundamental developments (the increased reflection of serious downside risks and overly rose-tinted glasses of the reopening and V-shaped recovery saga), the sellers are holding the upper hand currently. Our profitable open short position remains amply justified as stocks are likely to break down below the 50% Fibonacci retracement. The increasing US-China trade deal tensions only serve to add fuel to the fire – S&P 500 downswing catalyst.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

Has the Stock Downswing Started in Earnest?

It turned out that the late Tuesday Kaplan and Kashkari pronouncements were an opening act in yesterday’s Powell appearance. Fed Chair’s realistic and grim assessment just served to put pressure to throw yet another lifeline to the real economy. While this is far from the last Fed’s word, the bulls didn’t really find anything to cheer. How good and timely that we’ve issued an intraday Alert to jump in immediately onto the short side of the market to take advantage of the just unfolding slide! As the Congress is split on the Democrat-proposed $3T bill, how far can it go on?

S&P 500 in the Short-Run

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

Despite some encouraging signs of overnight stabilization, stocks gave up the gains just as the Powell speech went on. Diving on heavy volume, the 50% Fibonacci retracement provided support to the buyers yesterday. Given the sell signals of the daily indicators, we’re of the opinion that this support won’t likely hold for too long.

This is how we have summarized it in our yesterday’s intraday Stock Trading Alert:

(…) After the back-and-forth trading of recent weeks and all the signals favoring either the bulls or the bears at different junctures, the prevailing direction appears to be down now.

Powell delivered his own version of the Fed has given its best shot and coupled it with a call for more fiscal action. The point that the markets focused on the most, appears to be that despite the swift response and pledge to do more (while ruling out negative interest rates), it’s the admittance of serious downside risks to the real economy and the fragile nature of the much-hyped recovery.

Both stocks and junk corporate bonds gave up on their efforts to reverse the preceding downswings, and stocks as the more vulnerable ones are leading on the way down. After all, should some of the reopening efforts backfire, what state of confidence would that leave the consumers and companies 6 or 8 weeks from now? The valuations would be even more extended than they have been already.

Thus, more twisting of the policymakers’ arms rules the day, and given the credit markets – S&P 500 sectors dynamics, won’t likely end all that soon.

Coupled with the Fauci testimony, second wave outbreaks around the world and outside the State of New York clusters of domestic infections, those were no good news for the bulls. It appears that similarly to the runup to the coronavirus plunge during February, stocks are first slowly, then more quickly coming to realization of the serious downside risks. Back then, the credit markets were showing non-confirmation of the stock advance to the all-time highs almost on a daily basis – eventually resolving with a slide, and the rest is history, as they say.

How do the credit markets look after yesterday’s session exactly?

The Credit Markets’ Point of View

High yield corporate debt (HYG ETF) went slowly but surely deeper into the red as the session progressed. The sizable volume behind the two-day downswing is a warning sign, pointing to more downside ahead. Selling into the Fed’s hands on the acknowledged tough times ahead, anyone?

Importantly, the junk bond ratio to short-dated Treasuries (HYG:SHY) confirms the above assessment. As the next likely step, the challenge of late April lows looms – and for the HYG ETF as well.

Key S&P 500 Sectors in Focus

Technology declined on heavy volume, but retraced a part of the move lower. The daily indicators though wouldn’t agree that a local bottom is in. As a result, we expect more downside action over the coming sessions, which is supported by volume picking up on the downside.

The healthcare (XLV ETF) bulls didn’t step in as strongly before the closing bell, and yesterday’s volume wasn’t as large as in case of tech, relatively speaking. But these are the two most resilient sectors that have been performing strongest in the race off the March 23 lows – and still, their current price action leans bearish.

Out of the heavyweight, finance (XLF ETF) has been the weakest – both yesterday and since March 23. With buyers nowhere to be seen and the daily indicators as bearish as they get, downswing continuation is the path of least resistance here.

The early bull market sectors (energy, materials, industrials) also took a beating on high volume yesterday. Industrials (XLI ETF) are the weakest among them, already trading below their late-April lows. The bearish outlook they give (i.e. the bull market hypothesis being put to this heavy a test), is confirmed by the Russell 2000 (IWM ETF) downswing, again on high volume giving it credibility.

In closing, it appears that stocks won’t shake of another several million new unemployment claims figure as gracefully as last week – and that‘s an understatement.

Summary

Summing up, the bullish case appears increasingly lost as stock attempt to break below the 50% Fibonacci retracement. And given the momentum, credit markets’ performance and sectoral dynamics, it’s likely that the bears will succeed. Should the HYG ETF break below the late April lows, the bearish case would get a new lease of life. Combining the technical and fundamental developments though, the sellers are holding the upper hand currently regardless – the unfolding downswing is well placed to go on lower still. Our open and increasingly profitable short position remains justified.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

Were Stocks Rejected at Resistance for Good?

Right after the open, stocks took again on the 61.8% Fibonacci retracement, but retreated. Trading around the 2910 mark in a tight range, it appeared as base-building for the decisive push above the resistance. Instead, stocks fell through in the final hour of trading, coinciding with the Fed’s Kaplan and Kashkari tweets. Have they been a game changer?

S&P 500 in the Short-Run

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

Opening again almost at the 61.8% Fibonacci retracement, the bulls’ attempt to move higher fizzled out. Stocks declined, but not profoundly. That came only with the latest Fed pronouncements. This is how we commented on them in our intraday Stock Trading Alert earlier today at 2:30 AM EST:

(…) The slide in stocks later yesterday may look to be a decisive start of a downtrend, but it lacked volume rising well above previous sessions. Then, let’s consider the context. What groundbreaking message did Fed’s Kaplan or Kashkari say? That more fiscal stimulus might be necessary, and that we need to get the virus under control so as to fix the economy. Well, both statements are more than kind of obvious.

Finally, the overnight price action is bullish – after the initial hit, we got another downswing attempt refused, and fast. The same goes for the one-hour old attempt to reverse the upswing from the overnight bottom.

Since then, the bears pushed the futures once again to 2850, but after stabilization, prices rebounded to 2870. As a result, the above observations still remain valid.

Notably, we’ll get the Fed Chair Powell to speak and take questions at the Peterson Institute for International Economics webinar – at the US market open. The timing is peculiar to say the least, bringing back the memories of April 09, which is when the $2.3T backstop bombshell was dropped, powering stocks higher in its aftermath.

While past events are no guarantee of the future, the similarities are there. Another surprise statement wouldn’t surprise us, as the Fed hasn’t been projecting the aura of strength and decisiveness for a few weeks now. Considering the pace of events, that’s quite a long time these days. And yesterday’s price action appears to be a call to do something, as in twisting the Fed’s hand. Has it been enough?

Will the Fed banish the shadow of the doubts that lingers over the markets in recent weeks? Will fiscal policy ride to the rescue too? As we’ve seen yesterday both in stocks and bonds, the markets are calling for that. And we don’t expect the Fed to throw up their hands and say they gave it their best shot…

The Credit Markets’ Point of View

Opening with a bullish gap, high yield corporate debt (HYG ETF) modestly retreated in tandem with stocks. The sizable red candle was again born in the final hour of trading. Remember that the Fed’s vehicles to enter the debt ETF markets are ready now, and each successful debt rollover would support stocks. It makes a world of difference, having to pay just the coupon or the principal.

Such interventions work to push both stocks and bonds higher, at the cost of zombification of the economy (who in their right mind would backstop airline or cruise companies’ debt on currently prevailing terms?) and misallocation of capital. But that’s a story for another day.

Importantly, the junk bond ratio to short-dated Treasuries (HYG:SHY) confirms the above assessment. We have seen no downside reversal as both the ratio and the HYG ETF are trading solidly above the late April lows. As a result, the most likely resolution of this consolidation is to the upside.

Key S&P 500 Sectors in Focus

Understandably, both the heavyweight and early bull market sectors took a beating yesterday. The Russell 2000 (IWM ETF) also declined, and on higher relative volume than the S&P 500 did. While that’s bearish, the credit markets don’t support jumping to conclusions just yet. In other words, the bear market can’t be yet declared to have resumed just because reaching a 50% or 61.8% Fibonacci retracement after a historic selloff is a hallmark of bear market rallies.

Yes, that’s true despite the sizable reversal on meaningful volume in both technology (XLK ETF) and healthcare (XLV ETF), or the continuing underperformance of financials (XLF ETF).

Neither energy, nor materials slash industrials had a good day yesterday. While the early bull market trio seems to be running into headwinds, they have not rolled over decisively.

Summary

Summing up, despite the stock bulls being again rejected at the 61.8% Fibonacci retracement, the bullish case isn’t yet lost. How close to being over is the deterioration in the stock upswing internals? Credit markets hint at a temporary setback only. Our open long position remains justified, and needs to be tightly managed.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

Stocks at Resistance & Taking Their Time

Another day, another close at the 61.8% Fibonacci retracement. As yesterday’s session was preceded with quite a test of the bulls’ resolve, does it mark strength of the buyers, or their last gasp push?

S&P 500 in the Short-Run

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

Yesterday’s bearish gap at the open was closed, and the bulls have been adding to their gains throughout the day. Stochastics continues to be positioned constructively for the upswing to continue, but the CCI shows signs of weakness – just as the volume examination thanks to yesterday’s lower reading increasingly does.

Having said that, short-lived moves either way wouldn’t be at all surprising here, as the index looks for short-term direction. Can the outlook be refined once we look at the credit markets?

The Credit Markets’ Point of View

High yield corporate debt (HYG ETF) didn’t lead stocks higher yesterday, and actually closed not too far from where it opened on Friday. The same is true about its ratio to short-dated Treasuries (HYG:SHY). As the early May move lower was rejected, yesterday’s downswing is mostly likely a sign of ongoing consolidation in the ETF.

Unless the instrument breaks out above its late April highs, the stock uptrend would be best viewed with caution. For now however, and judged solely by the chart, more upside in the HYG ETF appears to be the path of least resistance.

The upswing in the ratio of high yield corporate bonds to investment grade corporate bonds (HYG:LQD) would support higher stock prices. Right now, it’s attempting to overcome the late March and April intraday tops – highlighting the return of risk-on environment. But isn’t getting extended? This chart reflects the headwinds the bulls are likely to face on their journey north.

Let’s move to the key S&P 500 sectors next.

Key S&P 500 Sectors and Ratios in Focus

Technology (XLK ETF) didn’t roll over to the downside, quite to the contrary. Erasing opening losses, the leading sector closed at new monthly highs. But it has suffered a setback in the last hour of trading. Both the upper knot and increasing volume serve as warning signs for the sessions ahead. Not necessarily right for the upcoming one, but should we see more selling into strength, it would be reasonable to start questioning the technology upswing.

Healthcare (XLV ETF) rose strongly, closing near the daily highs. Coupled with the positive turning points in the daily indicators, the volume would support taking on the April highs over the coming sessions.

Financials (XLF ETF) are relatively lagging, trading well below their late April highs – quite a lot lower that the HYG ETF does compared to its previous highs. Regardless of Stochastics’ buy signal, the daily indicators aren’t positioned all that favorably for an upswing.

What would an upturn in financials need? Junk corporate bonds overcoming their local highs. Will they do that once the Fed has its vehicles ready to start actually buying them instead of offering forward guidance to such effect? Wasn’t actually the Friday’s action merely an attempt to frontrun the Fed, and yesterday’s weak performance a reflection that we haven’t seen a proof of their start in earnest? Will they deliver that in tomorrow’s Powell speech?

Financials don’t appear to be buying the rumor heavily, and that’s an understatement. Their upcoming performance will shed valuable light on the S&P 500 prospects.

Neither energy, nor materials slash industrials had a good day yesterday. The early bull market trio seems to be running into headwinds. While they’re not rolling over, they aren’t enthusiastically leading higher. Unless reversed, that’s likely to turn into a headwind for the stock market advance over the coming sessions.

Summary

Summing up, stock bulls closed again at the 61.8% Fibonacci retracement, but the internals of the stock upswing appear to be deteriorating. Credit markets are not performing as strongly as expected on a very short-term basis, while technology and healthcare are the sectors left to carry the torch. The smallcaps haven’t continued with their Friday’s chase of higher prices either. This spells an increasing likelihood of the stock upswing being put to test over one of the nearest sessions. We’ll keep monitoring the evolving attempt to push higher still, assess its health and take appropriate trading decisions.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

S&P 500 Bulls Again At Resistance – Now What

Friday’s key data point were the non-farm payrolls. Horrendous and coming in at minus 20,500K, they surprised on the upside. After their release, stocks continued adding to their overnight gains, closing at the 61.8% Fibonacci retracement. Our previous bullish points turned out correct, but the key question is how strong is this rally? Can it power through this key resistance that is reinforced by the early March bearish gap?

S&P 500 in the Medium- and Short-Run

We’ll start this week’s flagship Stock Trading Alert with the weekly chart (charts courtesy of http://stockcharts.com ):

Stocks entered last week’s trading on a weak note, extending previous Friday’s losses in the overnight session to reach the 50% Fibonacci retracement. As Monday progressed however, the bulls cleared off the proximity of this support. The downswing attempt failed, and stocks closed sharply higher last week.

Yes, the weekly indicators are getting tired, but they are still far from flashing sell signals. Importantly, the weekly volume doesn’t show increasing commitment of the sellers, and accounting for the upside momentum, it doesn’t stand in the way of further gains. Apart from the below-mentioned resistances, the 50-week moving average is nearby – can the bulls make it there?

Let’s finetune the perspective on the daily chart.

S&P 500 opened on Friday with another bullish gap, and the uptrend continued throughout the day. The daily indicators are still constructively positioned, and the volume is just about right for an upswing. As the stock bulls closed the day at the 61.8% Fibonacci retracement, how strongly positioned are they to overcome the resistance where they failed not too long ago?

These were our Friday’s thoughts regarding the anticipated reaction to the non-farm payrolls:

(…) The point is that stocks have risen like phoenix from the ashes, and continue taking bad news in their stride. That’s what bull markets do, by the way.

Knowing that this hypothesis will be put to test over the coming weeks, let’s dive into the credit markets.

The Credit Markets’ Point of View

Opening with a bullish gap, high yield corporate debt (HYG ETF) continued leading stocks higher throughout the day. With its late April highs in sight, the daily indicators are in favor of the debt ETF’s upswing to continue. The rising volume coupled with the daily upswing attests to the increasing involvement of the bulls. In short, more upside appears to be the path of least resistance.

The ratio of junk corporate bonds to short-dated Treasuries (HYG:SHY) is also rising. Again, this shows that stocks are well-bid, and bullish spirits are just there at the moment. In other words, we’re rather in the risk-on than the risk-off environment.

The ratio of high yield corporate bonds to investment grade corporate bonds (HYG:LQD) also supports the above assessment.

As for the stock market to Treasuries ratio, this metric also reflects the stock upswing. Will it be able to overcome the late April highs? Judged by the credit markets’ performance, it’s not out of the question.

Let’s check the key S&P 500 sectors and their ratios – do they agree?

Key S&P 500 Sectors and Ratios in Focus

For the fourth consecutive day, the tech sector opened with a bullish gap on Friday. Adding to its opening gains, this leading sector closed solidly up. A word of caution though – while it’s reaching a new highs, Friday’s daily volume could have been higher. As a result, digesting recent gains wouldn’t suprise us in the very short-term.

Despite the risks being still skewed to the upside, let’s remember no market goes up or down in a straight line.

Let’s quote our Friday’s observations as they’re still valid today:

(…) Healthcare (XLV ETF) isn’t performing as strongly, but it isn’t breaking down either. The sector appears just consolidating. Should we see higher volume with yesterday’s candle, that would be bearish – but it wasn’t there. Thus, consolidation appears to be the most probable scenario here.

Helped by the rising HYG ETF, financials (XLF ETF) rose on Friday. First though, they had to repel the selling pressure – they did, and closed almost unchanged from their opening prices. It must be said that their performance could have been stronger, but they aren’t moving in perfect daily synchro with the debt markets.

The question is whether they’ll catch up over the coming sessions. Despite the lower daily volume, they can still do that – in late April, we’ve seen similarly low volume coupled with trading not too far from the swing lows, resolved with an upswing.

Let’s move on to the stealth bull market trio of sectors (energy, materials and industrials). Can it be said they’re leading higher?

While oil didn’t travel far since Wednesday, the energy sector (XLE ETF) recorded gains over the same period. That’s encouraging, but it hasn’t yet overcome its late April highs. As it’s positioned favorably to take on them, will the upswing attempt be supported by the other two sectors?

While materials (XLB ETF) also acted strongly on the day, they’re trading below the late April highs. Similarly to financials, there is some catching up to do if the stock bulls aim to move higher still.

Virtually the same notes apply to industrials (XLI ETF) as well. As a result, unless these three early bull market sectors keep overcoming their Friday’s highs, the S&P 500 is likely to consolidate its recent gains in the short term.

Do the leading ratios support the cautious tone?

Considering Friday’s strong gains in the index, the financials to utilities ratio (XLF:XLU) could have moved higher. Once it does, the stock advance would be driven more by the risk-on sectors.

The consumer staples to discretionaries ratio (XLY:XLP) could have also performed stronger on Friday, given the stock upswing. Both of these charts reveal a certain rotation in the S&P 500 – just like the strong performance of defensive tech stocks such as Apple (AAPL) or Microsoft (MSFT) does. Considering that the XLY:XLP ratio has made it back to its February levels already, some back-and-forth moves aren’t (and wouldn’t be) too surprising.

Briefly said, a short-term consolidation of recent gains would be favored by both sectoral ratios. And what about other metrics?

The copper to gold ratio would favor continued stock upside in place of consolidation or downswing. It carries no screaming sell implication just yet. Should it keep trading higher, it would actually help drive materials (and by extension also industrials and energy) up over the coming sessions.

That would be the key element if this S&P 500 rally is to go on. The broader the advance, the better for the prospects of further gains. When we see warning signs of more than a few sectors rolling over to the downside, we would know that the whole index would roll over eventually as well – and sooner rather than later.

With the above in mind, let’s overlay the S&P 500 moves with the key smallcap index, the Russell 2000.

While the two don’t move in perfect lockstep on a day-to-day basis, the Russell 2000 index (IWM ETF) sends valuable signals of either confirmation or non-confirmation of the S&P 500 move over the selected time period.

Having recovered just as steeply from the late March lows, the IWM ETF early April plunge turned out a bear trap. During the stock struggles with the 50% Fibonacci retracement, IWM went sideways, only to spurt higher as stocks raced to the 61.8% Fibonacci retracement. On the stock selloff early last week, IWM made a higher high – that’s a bullish sign of buying pressure returning to the smallcaps.

Should IWM continue catching up relative to the S&P 500 (after all, they haven’t retraced as much of the downside move), that would support the stock upswing to continue – regardless of whatever S&P 500 consolidation we might get over the very short-term.

This works just like the Dow theory or the credit market cues – it’s a process of catching up that shows which way the non-confirmation will be resolved. And such times can take not only weeks, but months. Currently, the IWM signal gives a gentle nod to the bullish camp.

Summary

Summing up, stocks again proved resilient in the face of Friday’s grim employment data. While the key metrics of the debt markets (high yield corporate bonds and its ratios) continue supporting the stock upswing to go on, the stocks to Treasuries ratio spells short-term caution. The message of key S&P 500 sectors is mixed but still with bullish overtones. While we might not see such a strong weekly close this Friday as we did the previous Friday, the risks at the moment continue being skewed to the upside. That would be especially true should the smallcaps continue catching up relatively to the S&P 500. Accounting for the premarket developments (bearish gap and upswing rejection, we’ve already closed the long position and taken respectable profits off the table).

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

Right Now, the Bullish S&P 500 Ride Goes On No Matter What

Yesterday, we’ve pointed out the many bullish signals going for stocks, and saw them open higher, and extend their gains. Well, that was true about the first half of the session, as the S&P 500 returned to trading close to unchanged before the closing bell. Is the upswing over now?

In short, we doubt that.

S&P 500 in the Short-Run

Let’s start with the daily chart analysis (charts courtesy of http://stockcharts.com ):

Yesterday’s volume wasn’t too high or too low – it’s actually quite consistent with what you would expect to see during an unfolding uptrend. As a result, the upswing has a pretty good chance of continuation – especially when you consider that stocks made another closing high yesterday. True, it’s still below the previous high, but we haven’t seen any sign of a reversal.

That’s why there can be no talk of a head-and-shoulders pattern reversal. First, the right shoulder isn’t completed – and we haven’t seen a breakdown below the neckline of this potential pattern-in-progress either. As it’s not completed, it carries no implications – and in our opinion, taking on the 61.8% Fibonacci retracement is more likely than breaking below the 50% one. So much for the bearish pattern.

But today, we’ll get the non-farm payrolls data, and they’ll be horrendous, you might say.

Yes, they will be indeed ugly. Uglier than ugly. But we’ve seen this story on Wednesday already – the market took a hit initially, but refused to decline for much longer. Accompanied by the credit market signals, this has made us enter into a long position, and we’re still profitably riding it this very moment. The point is that stocks have risen like phoenix from the ashes, and continue taking bad news in their stride. That’s what bull markets do, by the way.

Let’s recall our yesterday’s notes – they might turn out handy later today should we get a really bad number:

(…) It would be easy to jump to conclusions and cry that the sky is falling – but would that be justified? As they say, don’t throw the baby out with the bathwater.

The measured way of dealing with such a curveball would be to ask whether the outlook has changed.

Should the outlook as we assess it in its complexity indeed change, we’ll make an appropriate decision.

Preaching to the choir, we went on to write these timeless thoughts:

(…) What is the lesson here?

As for each and every trade, it’s to interpret the signals in their entirety – that’s the only way to get odds in your favor as much as reasonably possible.

As for trading performance over the long run, it’s to dutifully and attentively listen to the market’s many messages on a daily basis – with an open and flexible mind. It’s only over a long enough period of time and with sufficiently large a trade sample collection, that you see the edge you’re working with bring fruits. Christmas doesn’t come regularly in trading, and it would be foolish to jump out of the window because of any single trade.

Coupled with a money management lesson, you must give the edge enough breathing space to work its magic, and risk only as much (or even better, as little) so as to mount the next trade where the odds are again in your favor. And after that, the next one – regardless of the preceding day‘s result. And so on – trading is a marathon, not a sprint.

With that in mind, let’s dive into the credit markets now.

The Credit Markets’ Point of View

Opening with a bullish gap, high yield corporate debt (HYG ETF) gave up most of its intraday gains during the day, taking a dive in the last 30 minutes of trading. While the long upper knot looks sinister, the outlook again hasn’t changed – they haven’t broken below their recent lows.

The ratio of junk corporate bonds to short-dated Treasuries (HYG:SHY) has performed slightly worse yesterday, driven by rising Treasuries across the board. Yes, not only the short-term ones (SHY ETF) went up, the same goes for long-dated ones (IEI ETF) too.

Again, unless we get a break below the recent lows, this charts’ outlook hasn’t changed either.

Let’s move to the key sectors next.

Key S&P 500 Sectors and Ratios in Focus

Another day, another new closing high in the tech sector (XLK ETF). Regardless of the upper knots of recent days, technology just continues to open higher the next day. While yesterday’s volume has been heavier that the days before, it would be premature to talk about a reversal. As things stand currently, technology continues to lead the S&P 500 upwards.

Healthcare (XLV ETF) isn’t performing as strongly, but it isn’t breaking down either. The sector appears just consolidating. Should we see higher volume with yesterday’s candle, that would be bearish – but it wasn’t there. Thus, consolidation appears to be the most probable scenario here.

Supported by the bullish action in the HYG ETF early in the day, financials (XLF ETF) also opened with a bullish gap and extended gains. Unlike junk corporate bonds though, they haven’t given them up before the session was over, which is a bullish sign for the sector – and thanks to its ratio to utilities (XLF:XLU), also for the whole index.

As for the stealth bull market trio of sectors (energy, materials and industrials), their performance was somewhat mixed yesterday. Both energy (XLE ETF) and industrials (XLI ETF) opened higher, gave up their intraday gains, and closed virtually unchanged on the day. Only materials (XLB ETF) did better and held onto around half of their regular session’s gains.

Overall though, their message is bullish – and it’s also supported by yet another monthly high in the consumer staples to discretionaries ratio (XLY:XLP). By the way, this leading indicator is already trading well above where it was throughout each and every day in March.

Summary

Summing up, stocks again proved resilient in the face of grim employment data yesterday. While high yield corporate bonds wavered in the final 30 minutes of trading, their outlook hasn’t been invalidated – they continue to support the stock upswing. Coupled with the sectoral performance and key ratios, it’s likely we’ll see stocks shake off today’s bad employment data, and continue their grind higher. Our open and increasingly profitable long position remains justified.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

The S&P 500 Signals Cleared Up – And They Lean Bullish

Yes, it has been only yesterday when we talked about the mixed signals stocks were sending out. Given yesterday’s surprise finish to their intraday resiliency, it might seem misplaced to interpret those hints as bullish. Yet, that’s exactly what has happened, and the following analysis will thoroughly cast light on all the whys.

S&P 500 in the Short-Run

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

Starting off with the sizable upper knot of Tuesday’s candle, the bulls suffered rejection of higher prices as they raced off the 50% Fibonacci retracement rendezvous on Monday. On the fundamental news front, all eyes were yesterday on the ADP employment data. Whichever way you look at it, losing over 20 million jobs over a month is plain horrible. We expected the market to sell off on the news – and it indeed initially do that by erasing the opening bullish gap and diving below yesterday’s closing prices.

Hand-in-hand, we looked for the debt markets to decline. Just as the S&P 500, high yield corporate bonds (HYG ETF) also opened higher and kept sliding in confirmation of the developing S&P 500 downswing. Yet as they caught a bid just below $79, they stabilized and attempted to rebound, taking stocks predictably along. That was the moment we deemed our short position no longer warranted, closed it and actually entered a long one.

This is how we have justified the action in one of our yesterday’s intraday Stock Trading Alert:

(…) High yield corporate debt (HYG ETF) retested the daily lows below $79, and it appears they’re holding. Notably, the local lows support is at $78 – a full dollar lower. Looking at the sensitivity of stocks moving in lockstep with the instrument, that would translate into quite many points before we could talk of an outlook determinant (HYG ETF holding above support with each preceding intraday downswing fizzling out) having changed.

Monday’s intraday HYG ETF low was $78.20, and the S&P 500 low was 2771. For sure, seeing corporate bonds dive well below $79 wouldn’t be a happy sight, but it’s not unimaginable in the short run – especially given the key Friday’s jobs data (these are more important than tomorrow’s unemployment claims). Yet, stocks haven’t tumbled on today’s figures – technology is up, healthcare refused to decline, and the volume behind declining energy, materials and industrials, will likely remain below yesterday’s levels, which would take away from the bearish implications.

So, despite financials being close to their intraday lows (at $21.47), the sectoral outlook isn’t disastrous in any way. Judgmentally, what was the strongest headline driving stocks lower at the start of the week? Trump playing the China tensions card. Stocks are listening to it more than to coronavirus and its job market or other implications.

Thus, it makes sense to interpret market action in light of the magnitude of reactions to unfavorable news and the time that has passed since. Especially after holding up this well against today’s ADP figures. Bluntly speaking, it’s like „throw at me whatever you want, I’ll recover shortly“.

And we don’t know when the next hit will come. Will it be chart-driven, or a headline one? Unless it breaks the back of the HYG ETF (its support, that is), it doesn’t change the outlook for stocks.

The above tendency of the S&P 500 to prove resilient almost no matter what, was clearly more than worthy of consideration. And then the Trump statement expressing doubts whether China would live up to its commitments under the trade deal, came. Given the above-expressed sensitivity to the US – China trade relations, stocks understandably took a dive in the final 30 minutes of trading, across its many sectors and with deterioration seen in the HYG ETF as well.

It would be easy to jump to conclusions and cry that the sky is falling – but would that be justified? As they say, don’t throw the baby out with the bathwater.

The measured way of dealing with such a curveball would be to ask whether the outlook has changed. And as we’ll further see, no – it hasn’t changed, and actually presented us with bullish signs.

But first things first. Stocks are headline-sensitive – we get that. Yet, we articulated our opinion that stock bulls would just dust themselves off and recover – and do so still in today’s overnight session.

And that’s exactly what has happened, by the way. Stocks found a floor and peeked higher even before the strong China export data came in. We’ve also seen the stock futures recovery to continue during the European morning hours.

What is the lesson here?

As for each and every trade, it’s to interpret the signals in their entirety – that’s the only way to get odds in your favor as much as reasonably possible.

As for trading performance over the long run, it’s to dutifully and attentively listen to the market’s many messages on a daily basis – with an open and flexible mind. It’s only over a long enough period of time and with sufficiently large a trade sample collection, that you see the edge you’re working with bring fruits. Christmas doesn’t come regularly in trading, and it would be foolish to jump out of the window because of any single trade.

Coupled with a money management lesson, you must give the edge enough breathing space to work its magic, and risk only as much (or even better, as little) so as to mount the next trade where the odds are again in your favor. And after that, the next one – regardless of the preceding day‘s result. And so on – trading is a marathon, not a sprint.

All right, let’s continue with the S&P 500 assessment and dive into the credit markets next.

The Credit Markets’ Point of View

We’ve already discussed how well the high yield corporate debt held up in the aftermath of yesterday’s horrific private payrolls data. Again, the slide below $79 happened in the last 30 minutes of trading, giving us a sizable daily red candle.

But has the HYG ETF outlook changed? It could have broken much lower both early in the session, and towards its end – yet it didn’t. Just as in the Sherlock Holmes story “The Adventure of Silver Blaze”, pay attention to the dog that didn’t bark. And junk corporate bonds aren’t screaming that the sky is falling. Should they break below their recent lows, that would be a different cup of tea entirely.

Let’s proceed with sectoral analysis and key ratios. The messages are worth their weight in gold.

Key S&P 500 Sectors and Ratios in Focus

The tech sector opened higher, erased the ADP-driven downswing attempt, and only retreated in the final 30 minutes of trading. And again, this was a sight to see across many S&P 500 sectors. Still, it closed higher, which means that its leadership in the upswing-uphill battle remains intact.

Do you see how high the financials to utilities ratio (XLF:XLU) opened yesterday? Despite the setback, the ratio is making higher lows and trading with an increasingly bullish bias. This bodes well for higher stock prices ahead.

Consumer discretionaries to consumer staples ratio (XLY:XLP) is another leading indicator for stocks. It’s moving up as well, speaking not so softly in favor of the stock upswing.

The metal with Ph.D. in economics closed higher compared to gold, as well pointing to the bullish spirits returning.

If you look at the above three ratios, it’s apparent what we mean by the clear bullish signals. Regardless of yesterday’s China-headline-driven downswing, all the three leading indicators have taken the setback in their stride.

That’s what has given us increased confidence that the S&P 500 would rise like a phoenix in today‘s overnight session before you could say Jack Robinson.

And whatever today’s unemployment claims figure, it remains likely for the above reasons, that the stock index would just shake it off.

From the Readers’ Mailbag

Q: I learned that beleaguered Capri holdings and Macy’s were removed from S&P 500 not too long ago and replaced by in-favor or better performing stocks, eg. home delivery restaurant or pharmaceutical…. how would that affect your S&P 500 analysis? just imagine this is an on going process.

A: Well, it is an ongoing process of the S&P 500 face lift, and these readjustments happen regularly. S&P 500 is a very broad index, and even if you take the Dow Jones Industrial Average (DJIA) only, its 30 stocks composition has seen 6 changes in the last 10 years. But could a finger be pointed on the chart, and meaningfully explain consequences of getting a particular stock in or out? No, and therefore it doesn’t materially change the index analysis at the level we look at it on daily basis.

Q: your stop-loss is at xxxx or about x%, however, if I buy 3x ETF, what should the STOP be and profit target in percentage term?

A: On Apr 30, we’ve answered a very similar question that you might want to review.

Here’s the gist. As for the leveraged ETFs, please note that it really depends on their underlying assets (i.e. the ETF’s construction). Generally speaking, they are designed to magnify the intraday moves. If I were in your place, I would look at how the instrument performed during the recent upswings and downswings in the S&P 500 – did it roughly match the index move? That will serve as a useful guideline on where it’s sensible to place any kind of limit or market orders. If it hasn’t exactly matched that index move, a recalculation of what to reasonably expect from the instrument should the S&P 500 move to this or that level, is a sensible approach.

Finally, you’re asking about the stop-loss percentage. We’ve already discussed how important it is to risk moderately per each trade so as to be able to experience the edge working in our favor over the long run. In the overview of Trade Results at the Performance page of my home site, you’ll see the percentage of account risked on each past trade. That’s a key building block in the money management, because it allows you to risk only as much as you are comfortable with in any trade. At the same time, we manage our open trades according to the prevailing outlook, which means that not every take-profit or stop-loss order has to be hit to take us out of the open position. Capital preservation is the rule number one. The offense wins matches, while the defense wins championships.

Summary

Summing up, stocks proved resilient in the face of grim employment data, and the key corporate credit market has held up well through the day. Seeing that coupled with the sectoral performance, has shifted our bias from short to long. The bullish outlook is supported by the leading ratios’ performance, which goes to confirm the steadfast recovery from yesterday’s Trump doubts regarding the China trade deal. The bulls certainly appear in the mood to keep climbing the wall of worry again, and our long position remains justified.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

Making Sense of the Mixed Signals the S&P 500 Sends

Stocks made it clear they were not ready to decline back to the 50% Fibonacci retracement yesterday, and instead opened higher. The bulls have been patiently and slowly adding to their modest intraday gains, before losing them all in the final 45 minutes of trading. How did that change the balance of forces in the market?

S&P 500 in the Short-Run

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

The rebound from the 50% Fibonacci retracement continued yesterday, yet not without its fair share of obstacles – the sizable upper knot shows that clearly. Regardless, the daily indicators’ posture has taken a modest turn for the better, but just as the volume level, it leans in favor of more downside.

Would the credit markets favor a downside move?

The Credit Markets’ Point of View

High yield corporate debt opened higher, and has seen issues keeping additional intraday gains. It only managed to do so in the final 15 minutes of trading, which doesn’t bode well for a sustained move higher in the short run. We’ll see that later in this analysis when we discuss financials (XLF ETF).

But it must be said that corporate junk bonds closed higher behind respectable volume, which is a sign of non-confirmation to the wavering stocks. On the other hand, investment grade corporate bonds didn’t make any headway yesterday.

As both the HYG ETF and its ratio to short-dated Treasuries (HYG:SHY) keep trading both above its recent lows and below its recent highs, only a breakout either way will bring about more clarity. In our opinion, a break to the downside is more likely – and that would point to an upcoming downswing in stocks.

Right now, all we’re seeing is back-and-forth credit market action that provides no overly clear direction for stocks in the very short run.

However, the same can’t be said about sectoral analysis. Let’s dive into what the many sectors (including the message from financials) are telling us.

Key S&P 500 Sectors in Focus

The tech sector added to its opening gains, but these evaporated before the closing bell. The daily indicators are extended, but yesterday’s volume doesn’t represent a reversal. But it’s likely that we’ll see one in the nearest sessions, because one could be pardoned for expecting stronger leadership from the tech sector. And this means that the stock bulls are skating on increasingly thin ice.

Healthcare at least managed to hold on to much of its intraday gains, but the sector is also vulnerable to a takedown. It’s true that the daily indicators are improving but they did not yet improve sufficiently to herald sectoral uptrend return.

It’s high time for the story financials tell – and it’s not a bullish one.

Despite the corporate debt performance, financials entirely erased the bullish opening gap. They did so on slightly higher volume and during bearish daily indicators’ posture, raising the odds of more downside to come.

Coupled with the previous two S&P 500 heavyweights examination, the odds for a downswing in the entire index are alive and well.

Next, let’s discuss the stealth bull market trio of sectors (energy, materials and industrials) that are supposed to lead the index higher, if we are in a bull market, that is.

Considering yesterday’s upswing in oil, energy (XLE ETF) could have performed better. Instead, the sector moved down from its bullish opening gap to close where it did a day ago. Not exactly a show of strength.

Materials (XLB ETF) also reversed lower yesterday. Despite keeping very modest gains from the bullish opening gap, the overall implications are near-term bearish. The very same conclusion goes for industrials (XLI ETF) or consumer discretionaries (XLY), which mirrorer the action in materials.

Interestingly, consumer staples (XLP ETF) or utilities (XLU ETF) also ran into similar issues. It certainly doesn’t bode well for stocks overall that not even the defensive sectors perform.

Our yesterday’s observations proved correct:

(…) Overall, the sectoral analysis speaks in favor of a short-term pause in the S&P 500 downswing, and the $64,000 question is when will the move lower continue in earnest.

Today, we would add that the bulls will face a harder time keeping or extending gains. The 61.8% Fibonacci retracement is relatively near (around 2935), if they can make it there at all. If we take a close look at the daily S&P 500 chart again, we see rising volume around the local tops, with the volume on the upswings quite far from matching it. This speaks subtly in favor of being in the latter stages of a sharp bear market rally, which is confirmed by the wobbling stealth bull market trio of sectors.

Summary

Summing up, stocks extended gains from the 50% Fibonacci retracement rebound, and the credit markets improved yesterday. That would speak for the S&P 500 upswing to continue, but the sectoral performance doesn’t confirm that at the moment. While the bulls’ standing improved since the start of Monday’s trading, the risks continue being skewed to the downside. This is confirmed by the daily volume examination – regardless of the back-and-forth trading of the day, it appears we’re in the early stages of the S&P 500 downswing and our short position remains justified.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

The Bulls Respond to the S&P 500 Selloff

Stocks opened yesterday with a bearish gap, yet the 50% Fibonacci retracement withstood the test, and the bulls staged a comeback. Let’s dig deeper into the health of the comeback – does it mark a reversal?

S&P 500 in the Short-Run

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

Friday’s bearish momentum continued into yesterday’s premarket session, but the bulls gradually repaired the damage, and closed the opening gap in the final two hourly candles of yesterday’s trading. So, the 50% Fibonacci retracement withstood yesterday’s test.

However, the rebound didn’t happen on volume levels that would be consistent with turnarounds, and instead gives an impression of a short-term pause in the downswing. The daily indicators’ sell signals have also been unaffected by yesterday’s price action.

Our yesterday’s observations on volume hold true also today:

(…) In all likelihood, the lower volume just shows that a larger move is underway, and that the bulls don’t find the setup interesting enough to step in and buy with conviction. Similarly the bears don’t find it a good time or place to get out of their positions just yet.

As credit leads stocks, how did the debt markets do yesterday?

The Credit Markets’ Point of View

Just as its ratio to short-term Treasuries (HYG:SHY), high yield corporate debt also opened lower, yet refused to decline further. As it were rising, we closed our profitable Friday’s short position, while stocks were still consolidating. Let’s quote from our yesterday’s intraday Stock Trading Alert:

(…) The S&P 500 bulls didn’t take advantage of the price recovery from overnight lows just above 2770 to well over 2815, and the credit markets (HYG ETF and LQD ETF) are losing steam. This increases the likelihood that we’re not to see their immediate rebound in the session, but rather bobbing above and around their last week’s lows – and that doesn’t bode well for any S&P 500 upswing in the short-term.

Since then, the HYG ETF declined a bit more only to revert to trading close to unchanged on the day, while stocks lagged. This prompted us to reenter the short position at a better risk-reward ratio thanks to the preceding credit markets action. Stocks rose strongly only in the final 75 minutes of trading, while corporate junk bonds saw their upswing attempt rejected during the same time window. Unless credit markets (yes, we mean the LQD ETF as well) perform strongly later today, stocks are getting ahead of themselves in a way.

Investment grade corporate bonds didn’t experience a selling wave after the open, yet they also refused to move up during the day. The same is true about its ratio to the longer-dated Treasuries (LQD:IEI).

Importantly, just as with the HYG ETF, the LQD ETF session was characterized by lower volume, and thus lacks implications of any kind of reversal. Unless both ETFs’ moves lower are reversed, the credit markets aren’t really on the bulls’ side right now.

Key S&P 500 Sectors in Focus

The tech sector erased its opening losses, and cut deep into Friday’s bearish gap. But the volume of the upswing didn’t outshine that of the preceding downswing. Given that the S&P 500 futures trade at around 2850 as we speak, technology will surely open higher later today and attempt to resume leadership.

Healthcare merely managed to slow its pace of decline yesterday, but the lower knots of two preceding sessions reveal where the bears are meeting buying interest. With that in mind, a short-term upswing isn’t out of the question. That’s fine, because no market goes up or down in a straight line.

As the credit markets stood relatively unchanged, how did that reflect upon the financials?

The financials also largely refused to decline during the day, and their move happened on larger volume than Friday’s downswing. It means that a short-term rebound can’t be ruled out, regardless of the daily indicators of all these three S&P 500 heavyweights favoring a move lower.

Next, let’s discuss the stealth bull market trio of sectors (energy, materials and industrials) that are supposed to lead the index higher, if we are in a bull market, that is.

Energy (XLE ETF) moved up, closing just below its Friday’s open, on not too bad a volume – but still trades well below its local peak. So did the materials (XLB ETF), but given their larger Friday’s gap, the implications aren’t as bullish as in the case of energy. Industrials (XLI ETF) performed along the lines of financials, which means that they just refused to decline on the day, and couldn’t bring themselves up to closing even their Monday’s gap, let alone the Friday’s one.

Overall, the sectoral analysis speaks in favor of a short-term pause in the S&P 500 downswing, and the $64,000 question is when will the move lower continue in earnest.

Later today, we’re getting the ISM non-manufacturing PMI. While it’s likely the reading will come in at above expectations, stocks might meet a buy-the-rumor-sell-the-news reaction.

The Fundamental S&P 500 Outlook

Stating the obvious, the reopening euphoria keeps being a major theme. As it’s a long process, its veracity will be continually reassessed, and we’re of the opinion that the market is assigning too high a probability to a V-shaped outcome, which should drive disappointment.

The rally we’ve seen from the Mar 23 bottom, has been a sharp one, and a multi-week affair on top. But it’s within the bear markets where the strongest rallies happen – and they might take a time to reverse. First meekly, then more profoundly. Even if the stealth bull market sectors regain the pool position and overcome their local highs down the road, the current consolidation with a bearish bias still hasn’t run its course in our opinion.

The credit markets are the places to watch right now. Once they break below their local lows (and it’s more likely than not that they will), stocks will catch up with vengeance.

Summary

Summing up, stocks rebounded from the 50% Fibonacci retracement, but the credit markets and sectoral performance are giving mixed signals. Stocks are getting ahead of themselves, unless the corporate debt markets reverse higher. On balance, it appears we’re in the early stages of the S&P 500 downswing and our short position remains justified.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

 

The Opening Salvo in the S&P 500 Downswing

The glimmer of hope offered by stronger than expected ISM Manufacturing PMI data proved short-lived, and gave us an opportune entry point to exit the prior long position on better terms, and simultaneously open the new and immediately profitable short position.

S&P 500 in the Medium- and Short-Run

We’ll start this week’s flagship Stock Trading Alert with the weekly chart (charts courtesy of http://stockcharts.com ):

The long upper knot shows how far the rally has reached over the week, almost touching the 50-week moving average. However, prices reversed sharply lower, and did so on higher volume than was the case throughout the preceding upswing. That’s a bearish omen.

Let’s check the daily chart to see how the story of decelerating weekly indicators is most likely to proceed.

The sizable bearish gap at the open drove prices lower in the following hours regardless of the positive manufacturing surprise. It’s true that Friday’s volume has been lower than that of Thursday’s reversal with the comeback attempt to the 61.8% Fibonacci retracement. Does that mean the downswing is running out of steam?

In all likelihood, the lower volume just shows that a larger move is underway, and that the bulls don’t find the setup interesting enough to step in and buy with conviction. Similarly the bears don’t find it a good time or place to get out of their positions just yet.

As the daily indicators are overwhelmingly in accord with the downtrend’s chances to continue, which areas could prove an obstacle for the sellers?

The 50% Fibonacci retracement at around 2790 is the closest at hand, but we don’t expect it to be overly strong at stopping the bears. Depending on the momentum and time it gets to reach, the 2750-2720 area might prove stronger. This is the area marked by the 50-day moving average on its upper end and previous local lows on the lower end.

Depending on the technical signals we get along the way, we’ll be able to better assess how far the downswing could go, and make appropriate trading decisions.

With that in mind, let’s check the debt markets.

The Credit Markets’ Point of View

High yield corporate debt turned lower, in unison with the declining stocks. And so did its ratio to short-term Treasuries (HYG:SHY). Is the message from investment grade corporate bonds (LQD ETF) any better?

Not really, and this better-rated corner of the corporate debt world, is actually leading the downside move. And again, so is its ratio to the longer-dated Treasuries (LQD:IEI).

Unless both ETFs’ moves lower are reversed, the credit markets aren’t really on the bulls’ side right now.

Key S&P 500 Sectors in Focus

The tech sector tried hard to erase the opening losses, but just could close Friday’s gap. Just as the S&P 500, it closed near its lows on respectable volume, giving the coming move lower a pretty good chance of continuing. The daily indicators are rolling over to the downside, supporting the downswing.

Healthcare mirrors the action in tech quite well, with the exception of an attempt to close Friday’s bearish gap. As this was near to nonexistent in this sector, it subtly speaks in favor of more downside to come – just as the daily indicators’ sell signals do.

As the credit markets‘ standing has deteriorated, how much was it reflected in the financials?

The financials‘ outperformance is over, and the sector has moved steeply lower. Thanks to the position of the daily indicators, the downswing has a good chance to continue as well.

Next, we’ll examine the stealth bull market trio of sectors that are supposed to lead the index higher, if we are in a bull market, that is. So, let’s check energy (XLE ETF), materials (XLB ETF) and industrials (XLI ETF).

Energy clearly reversed, and its relative strength (or lack thereof) as we see the S&P 500 going lower, will be an important signal in assessing the health of the decline and prospects for upside reversal. For now, there’s been no sign of strength on Friday.

A similar conclusion can be reached from the materials examination. While they held up better throughout the day (just like consumer discretionaries, the XLY ETF, did), it’ll likely prove to be of fleeting nature only (in both cases).

And that’s also true with industrials, where the weakness was more along the lines of energy. Plain obvious, that is.

Overall, this mix shows that there can be no talk of a local bottom being reached. The S&P 500 downswing has its ducks ligned in a row right now.

The Fundamental S&P 500 Outlook

Early in the week, the bulls enjoyed earnings reports that beat expectations among the tech heavyweights. That however changed with Thursday’s aftermarket Amazon (AMZN) release – it’s notable, how easily could the whole of its Q2 projected profit get gobbled up by coronavirus-related expenses, as they foresee it would.

The reopening euphoria has run against the wall as about half the States have partially reopened their economies. The epidemiological situation is improving in some areas while deteriorating in others, underscoring that jumpstarting the economy would be a long process. As we noted in our April 12 Stock Trading Alert, while there is a legitimate desire to get the economic life going again, these factors are to be counted with:

(…) 1. the stress and damage to the supply chains

2. consumer confidence and lifestyle habits

3. small and medium business capacity to absorb the shocks

4. the ability to buy time and soften the blow via monetary and fiscal interventions

Going into Friday’s trading, the Trump finger pointing on China for coronavirus raised fears about the trade war that took a backseat to the pandemic. Understandably, not even the high hopes placed in remdesivir getting the emergency use authorization, could turn the sentiment.

Fundamentally, we expect the stock market to reassess its overly optimistic prospects against the economic impact on the ground. Stock valuations are likely to be viewed as extended, and this supports the bearish bias over the coming sessions.

From the Readers’ Mailbag

Q: What would you think would be the next level down on the SP 500? 2793 – the 50% FIB retracement from the lows? or 2652 – the 38,2% retracement?

A: The 50% Fibonacci retracement is within spitting distance, and in the course of the S&P 500 daily chart analysis, we’ve discussed an area in between these two retracements that we expect to give the bears a harder time than the 50% Fibonacci retracement. Throughout the move, we’ll be monitoring the sectoral strength, their ratios, and the credit markets, for these will give us an idea how far the current downswing can actually reach. We think that we’re in the opening stages thereof, and that our open profits will keep growing before it’s justified to close the trade.

Q: Should I buy at around 2600?

A: It’s too early to say that, as the above points about credit markets, sectoral strength, ratios and fundamental developments apply whatever numerical target we discuss. Together, they’ll form the basis for our upcoming trading decision, and yes, stocks declining to the low 2600s is one of the preliminary scenarios or hypothesis if you will.

Summary

Summing up, stock rolled over almost all the way down to the 50% Fibonacci retracement, highlighting the significance of the reversal from the 61.8% Fibonacci retracement. The credit markets support the downswing, and so does the broad sectoral analysis. We’re in the early stages of the S&P 500 downswing and our open and profitable short position is amply justified.

We encourage you to sign up for our daily newsletter – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. If you sign up today, you’ll also get 7 days of free access to our premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care


All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.

How Much Lost Ground Can the S&P 500 Bulls Recover?

Stocks couldn’t build on Wednesday’s gains, and the bulls had to face selling pressure during yesterday’s regular session. While they’ve dealt with a good part of the intraday downswing, they couldn’t close the opening bearish gap. How does the bullish case look at the moment?

S&P 500 in the Short-Run

We’ll open this section by quoting from today’s intraday Stock Trading Alert that we’ve posted prior to this regular article (charts courtesy of http://stockcharts.com ):

(…) S&P 500 opened lower yesterday, and despite the selling pressure during the session, prices held up relatively well. Having closed at 2912, the breakout above 61.8% Fibonacci retracement has been however rejected.

Given the positive market reaction to Big Tech earnings earlier this week, it was reasonable to expect a similar reaction to the Amazon (AMZN) report after the markets closed yesterday. The company’s revenue managed to beat expectations, having risen 26%, yet the Q1 profit fell to $2.5bn from $3.6bn in the prior year. The market deemed it underwhelming, and the stock soundly declined in aftermarket trading, dragging the index lower along.

Prices declined steeply in the overnight trading, extending yesterday’s moderate downswing. That’s how yesterday’s session looks on the daily chart:

The daily candle and volume examination leans in favor of an early stage of a downswing. The chart itself though doesn’t preclude a consolidation phase coupled with a renewed run to the 61.8% Fibonacci retracement. Given the sizable volume of last two sessions though, such a run would have little change of overcoming this resistance, which is also reinforced by the zone defining the early March bearish gap.

The fly in the ointment is the reaction to Amazon earnings. This steep a selloff makes it more than likely that the bear leg has already started in earnest, without a renewed attempt to reach the 61.8% Fibonacci retracement.

All right, as the S&P 500 futures trade now at around 2835, does that mean we won’t get a better price point to exit our long position? Regardless of the deterioration we have seen in many S&P 500 sectors yesterday, we’re likely to be offered an opportunity to reassess the outlook and our decision (coupled with a better price point than the current one).

As a result, we’re of the opinion that exiting the open long position at this moment (4:10 AM EST) isn’t justified.

Indeed, prices have moved to 2850 just before 5:00 AM EST. But the point is not about selling having momentarily waned. It’s about both the credit markets and S&P 500 sectoral strength. Let’s start with the debt markets.

The Credit Markets’ Point of View

The high yield corporate debt to short-term Treasuries ratio (HYG:SHY) held up well on a daily basis. The volume examination of the HYG ETF itself (and also of municipals, the HYD ETF) is encouraging – the short-term debt markets aren’t showing signs of deterioration.

However, this can’t be said about investment grade corporate bonds to the longer-dated Treasuries ratio (LQD:IEI).

It’s not a good short-term omen that the decline in the ratio was driven primarily by the declining high quality corporate debt. Unless this gets reversed and we see a breakout higher out of the bullish flag, this doesn’t bode for the risk-on environment.

Key S&P 500 Sectors in Focus

The daily candle in the tech sector doesn’t lean in the direction of immediate gains. We’ve already mentioned the Amazon (AMZN) situation. Soon after the open, we’ll see the extent of damage suffered throughout the sector, and assess the ability of the bulls to recover.

While healthcare didn’t decline much, it’s in a precarious technical situation. The deteriorating daily indicators point to short-term downside, and higher volume of yesterday’s session points to increasing involvement of the sellers. Just as in tech, the buyers‘ ability to come back will guide our upcoming trading decision.

As the credit markets didn’t give all too clear signals yesterday, which way did the financials move?

They moved down, but could prove more resilient than healthcare in the upcoming test of the bulls.

As for energy (XLE ETF), materials (XLB ETF) and industrials (XLI ETF), it’s these sectors that have us on the edge. They all declined. While it can turn out to be the opening salvo in their own downside reversals, their individual charts point rather in the direction of only a short-term setback. This is because their prior upswings have made it above their preceding local highs, and also the volume increase on their yesterday’s downswing didn’t rise as much as it did in either in tech or healthcare.

From the Readers’ Mailbag

Q: I’m very much a bear with where this market is right now, however I finally went long based on your analysis, and I caught the last big leg up. So thank you! However, today (today’s premarket session) has been brutal…

A: Yes, the disconnect between the real economy incoming data and the stock market strength is palpable. However, we trade the stock market, and have to be keenly aware of what’s going on there.

That’s right, the Amazon disappointment is a setback, and we’ll be monitoring the buyers as they go about repairing the damage. So far, it’s nothing to call home about, but let’s not jump to conclusions just yet, we mean right now.

That however can’t be said about the moment that is much nearer to when you reading this article (10:35 AM EST). The weak reaction to a positive surprise in the ISM Manufacturing PMI number didn’t really lift stocks. While the market can move in tricky ways in the very short-term, we see sideways to bearish bias as the ruling one right now. As it’s reflected in both the credit markets and selected key S&P 500 sectors right now, we have just taken a new trading decision. How will it pay off?

Summary

Summing up, the 61.8% Fibonacci retracement challenge fizzled out yesterday, and given the Amazon aftermarket developments, the S&P 500 is bound to open lower later today. The credit markets’ message is rather inconclusive in the very short-term, but the cracks in the sectoral performance are more apparent. Monitoring the extent of the bulls’ comeback has formed the basis for our upcoming trading decisions. Earlier today, the open long position remained justified as we were likely to be offered a better exit point down the road. And we indeed were. Then, a new trading decision followed…

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Thank you.

Monica Kingsley

Stock Trading Strategist

Sunshine Profits – Effective Investments through Diligence and Care

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA 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, Przemyslaw Radomski, CFA and his 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. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he 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. Przemyslaw Radomski, CFA, 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.