S&P500 Bulls Got Tested – All-Time Highs Next?

Stocks are getting so much closer to the all-time highs – day in and day out. The bear raid I anticipated, has been soundly defeated yesterday, stocks are extending gains and adding to my open profits  Sure, greed is elevated, but not absolutely extreme. There aren't too many traders willing to make the contrarian bet and buy puts - the put/call ratio keeps hanging at the early June lows.

Yes, consider the stimulus conundrum kind of solved for now, and with the Fed support in the wings, the real economy realities can wait and be overshadowed by the China rebound stories and positive German sentiment readings. With the U.S. markets taking a cue and ready to bridge several quarters ahead, the path of least resistance in the S&P 500 is still higher as it's way too early for the elections uncertainty to hit like a sledgehammer.

The rising trend in Treasuries has been punctured by a two-day breather now, helping to fuel the bullish spirits in stocks – the conventional wisdom goes that when yields rise, the economic recovery has legs. With the dollar rally running into headwinds yet again, the risk-on trades gets another ally.

Last but not least, the correction in gold I called for on Friday to happen, takes away from the momentary inflation fears. And inflation rearing its ugly head, that would have the power to throw the stock bull out of whack. We aren't there yet.

S&P 500 in the Short-Run

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

Stock prices are steadily climbing higher, and yesterday's rising volume shows that the bears didn't attack in a really convincing way. Not too much firepower was needed to overcome them. Undeterred, stocks keep reaching higher.

But the Feb all-time highs are drawing nearer, and so does the upper border of the rising black trend channel on the weekly chart I featured yesterday. It's likely that these levels would result in fiercer battles fought.

As yesterday's downswing didn't turn into a correction, do the credit markets indicate smooth sailing ahead now? Not yet, not fully – that's my take.

The Credit Markets’ Point of View

The sideways trend of recent days in high yield corporate bonds (HYG ETF) goes on, and doesn't really attract much selling pressure on (please see this and many more charts at my home site). And with ongoing fiscal and monetary support, how would it all of a sudden?

But investment grade corporate bonds (LQD ETF) are declining second day in a row. That makes it a correction, not a reversal though – let's not jump to conclusions, as a higher high is still likely to be made.

The overlaid S&P 500 closing prices (black line) keep trading at very extended levels relative to the HYG:SHY ratio. Again, the same question as yesterday pops – has the index reached a tipping point where the bears would step in?

That could still happen this week (especially if corporate bonds start to move down from their high plateaus), and the bulls better have gains locked in preparation for such a possibility however remote that might seem now.

Three good reasons why the stock rally has a high likelihood to go on, and not just today, follow.

Smallcaps, Emerging Markets and S&P 500 Market Breadth

The Russell 2000 (IWM ETF) finally overcame its early June highs visibly. Its momentum is quickening vs. the 500-strong index momentum. No signs of distribution in smallcaps favors the stock upswing to go on.

The Dow Jones Industrial Average ($INDU) had a strong day yesterday, and Nasdaq ($COMPQ) erased much of its intraday decline. Yes, tech (XLK ETF) is moving back to the pool position in the sectoral overview of S&P 500 advance drivers.

With stalling dollar, the emerging markets had it easier to find a floor. And their strong performance since early July didn't really suffer. The bulls still enjoy the benefit of the doubt.

The S&P 500 advance-decline line is the third reason in favor of higher stock prices – its yesterday's upswing put to rest the scenario of a very short-term bearish divergence in the making. The short-term view of S&P 500 market breadth remains more healthy than not overall.

Summary

Summing up, the S&P 500 upswing goes on, and yesterday's attempt to move lower proved very temporary. The sentiment is risk-on again even as stock market metrics relative to the credit ones keep being very extended. The Feb all-time highs keep acting as a magnet, but better be ready for the possibility of a move lower in stocks arriving with little fanfare.

Thank you for reading today’s free analysis. I encourage you to sign up for our daily newsletter - it's absolutely 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 the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!

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 she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

********