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The S&P 500 closed again above the mid-Feb bearish gap, and the talk of taking on the all-time highs is intensifying. So does the greed that's growing more extreme with each passing day. With the put/call ratio approaching the early June lows, it's getting crowded on the buy side.

Stocks have been enjoying the Q2 earnings reports, brushing aside the stimulus wrangling and job market realities (yes, the federal continuing claims rose again, and combined with the state continuing claims, they're within spitting distance of their early July record total above 32 millions).

The longer the wait for a new package, the more will the reality's repercussions (this goes beyond consumer discretionaries) be reflected in stock prices. Hello second wave of unemployment, where the jobs that came back, are being lost again. Add elections uncertainty or a U.S. - China surprise, and a recipe for a pretty volatile autumn results.

But Trump signed on Saturday the executive orders so as to move past he stalling talks in Congress. Couple that with the Fed support, and the stock rally has more time to run.

Rising Treasuries though reveal a certain degree of distrust in the recovery story, and the precious metals bull front-runs inflation. These boil down to stagflation being baked in the cake.

All right, let's dive in to the charts.

S&P 500 in the Short-Run

I'll start today's flagship Stock Trading Alert with the weekly chart perspective (charts courtesy of http://stockcharts.com ):

Bullish price action for many recent weeks on volume that isn't yet inviting increasing participation of the sellers. This fact alone bodes well for higher stock prices in the medium-term, but the buyers will meet a set of two key resistances shortly.

It's the Feb all-time highs that are drawing nearer day by day, and the upper border of the rising black trend channel. I look for more emphatically contested encounters there.

On steady volume, the stock upswing goes on. Two attempts to move lower on Friday were rebuffed, and stocks closed at their intraday highs.

Such was my Friday's short-term battle plan:

(...) Yes, the daily indicators are increasingly extended, and it's not about the RSI merely. A breather that would coincide with temporarily lower prices, would be both refreshing and healthy for another upleg.

So, we have these days' bullish price action and extended daily indicators as prices are approaching the Feb highs against the stimulus negotiations that are draging on, and many a real economy sector's pain out in the open.

Should a correction strike, and take out the bulls such as myself again profitably out of the open position, it's imperative to assess the downswing's internals, whether it is or isn't turning into something more serious and not merely temporary.

So, have the odds of a correction risen? Credit markets might have the answer.

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) declined on Friday, but the volume doesn't tell the story of a reversal. Far from it, the uptrend with generally rising prices and limited intraday volatility hints at the market betting that the Fed has its back. After all, its balance sheet has barely moved till Wednesday, August 5.

That's also why I am not putting much emphasis on the daily bearish engulfing pattern in investment grade corporate bonds (LQD ETF). Let's read that move in the context of preceding days, and that means a daily setback within an uptrend, on not too convincing volume.

Both leading credit market ratios - high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) - have moved lower on Friday, because both corporate bond ETFs fell more than the respective Treasuries.

This points to the credit markets turning risk-off, which has the potential to carry over to stocks shouldn't the ratios' decline be a one day phenomenon.

The overlaid S&P 500 closing prices (black line) are getting more and more extended relative to the HYG:SHY ratio. Has the index reached a tipping point where the bears would step in?

The bulls better tread carefully here - as in have the gains locked in, because a bear raid will be an increasingly tempting proposition this week in my opinion.

Would that derail the stock bull run? By the shape of things, I still don't view that as likely. The elections uncertainty or the measured pace of the recovery aren't on the stock market's radar screen featuring prominently just yet.

Smallcaps, Emerging Markets and Copper

So far so good, the S&P 500 upswing was mirrored with the rising Russell 2000 (IWM ETF). The fact there's no distribution, no profit taking in the smallcaps, paints a picture of both U.S. indices' resiliency.

True, the situation in Dow Jones Industrial Average (DIA ETF) isn't as optimistic as the diamonds are trading still below their early June highs, which absolutely doesn't compare to the stellar performance of Nasdaq ($COMPQ).

Still, the non-confirmations can drag on for months, and be resolved at much higher prices. The key takeaway is that there hasn't been an immediate deterioration.

The same thing though can't be said about emerging markets (EEM ETF), because they've turned sharply lower - hand in hand with the dollar upswing. In my Friday's gold analysis, I've called for the greenback to put up a fight now, and non-U.S. stocks are feeling the heat.

Such a flight to safety has the potential to spill over into the States - the longer it last, naturally. And just as one swallow doesn't make a spring, Friday's EEM move means amber light for stock bulls.

The red metal ($COPPER) seconds that cautious conclusion as it had declined on heavy volume. Such a move has the potential to exert downward influence on the S&P 500 down the road.

S&P 500 Market Breadth

Given the S&P 500 upswing, the advance-decline line could have risen some more on Friday, and the fact it didn't, raises the possibility of a short-term setback. We might be looking at a very short-term divergence in the making (lower high in the indicator), but that would require a down-to-sideways trading to hit at this week's open.

Overall, the market breadth chart calls for short-term caution as well. The bulls enjoy the benefit of the doubt, but it's likely we're slowly but surely entering a period of not so smooth sailing ahead. Will the monetary and fiscal policy duo invalidate that?

Summary

Summing up, the S&P 500 upswing goes on, but many signs call for short-term caution as a soft patch in stocks might be not too far ahead. With the dollar likely to move higher in the short run, the risk-off echo could throw a spanner into the stock bulls' works. Time to dance close to the exit door should the bulls start running out of breath - every bull market has to endure corrections and the current one is no exception.

Thank you for reading today's free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

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

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The mid-Feb bearish gap has been closed, and S&P 500 is getting ever closer to the Feb all-time highs. The outlook for markets on my radar screen is shining quite brightly too. So, what stands in the way of overcoming those Feb highs?

The jobs data don't paint an entirely positive picture. Wednesday's ADP non-farm employment change fell way short of expectations, and stocks shook it off. Yesterday's new and continuing unemployment claims showed improvement, and stocks dutifully rallied. Which way will the effect of today's non-farm payrolls go?

Fundamentally, I look for the figures to rather disappoint in the big scheme of things. But this isn't about trading any number, and stocks might take a cue from their Wednesday's performance. Despite the encouraging look of the weekly chart (white candle on volume that is likely to surpass preceding week's one once today's closing bell rings), the bulls better remember about risk management and be ready for the scenario of a noticeable upper knot appearing on the weekly candle.

The following big picture view holds true also today. The jobs data will underscore:

(...) the pain real economy feels and its tenuous path to recovery. No knee-jerk reaction (...) means the markets aren't willing to take that seriously just yet (are they betting this soft patch would be gone?).

With U.S. - China tensions on the back burner, stimulus takes the spotlight - with a flare up in earnest between the frenemies (think trade deal phase one) being the wildcard (distant black swan), After a two-week window of the Fed expanding its balance sheet, the central bank tightened again as the data for the final July week show.

So, will the stimulus with its bone of contention in the form of federal $200 or $600 addition to unemployment claims be a buy-the-rumor-sell-the-news moment? In my opinion, the markets are more likely to welcome it than to sell off in its wake.

Today's Stock Trading Alert will be special in one way - due to popular demand, I'm including my personal gold views.

But let's deal with stocks first, and check their market pulse.

S&P 500 in the Short-Run

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

There is no debating the breakout above the early June highs, and the volume examination keeps favoring the bulls. The respectable volume with little intraday volatility is an ally of upcoming higher prices.

Yes, the daily indicators are increasingly extended, and it's not about the RSI merely. A breather that would coincide with temporarily lower prices, would be both refreshing and healthy for another upleg.

So, we have these days' bullish price action and extended daily indicators as prices are approaching the Feb highs against the stimulus negotiations that are draging on, and many a real economy sector's pain out in the open.

Should a correction strike, and take out the bulls such as myself again profitably out of the open position, it's imperative to assess the downswing's internals, whether it is or isn't turning into something more serious and not merely temporary.

Let's check the credit markets next.

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) rose again, and this time more noticeably than on Wednesday. The volume moved even more down though, which could mark a short-term indecision ahead.

Regarding these two ratios, my Wednesday's credit market observations are relevant also today:

(...) What a great sight as both leading credit market ratios - high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) - are supporting each other's upswings. One day the former has the baton, the next day the other leads. The direction is clear, enabling higher stock prices.

The overlaid S&P 500 closing prices (black line) is increasing its relative distance from the HYG:SHY ratio. Stocks indeed seem more than willing to lead, thus sending a message of the bull run having still a way to go.

Leading up to the gold part of today's analysis, let's recall the below notes about this stock bull run:

(...) So far, the propping efforts to bridge the mini-depression are working. The recovery off the March lows has been among the strongest ones when looking at all the WWII stock market rebounds that have made it past the 61.8% Fibonacci retracement. We're still in the "everyone benefits and no one pays" stages of inflation. The canaries in the coal mine flashing danger (hey, this can't last forever) are gold and the dollar.

Calling Out Gold

The daily gold chart reveals daily rising prices with Swiss clockwork precision since mid-July. The key question is how sustainable is the move that brought the yellow metal both above the 2011 all-time highs above $1,920, and breached the $2,000 handle.

It's beyond obvious that the daily indicators are heavily extended. The bulls are though still able to reach out for new highs practically on a daily basis - but it's the upper shadows of recent candles that raise the odds of the bears interfering with the bullish ride.

The yellow metal is the strongest performing part in the precious metals arena - while silver is catching up mightily (thus bringing the gold to silver ratio back to its 2016-2018 range), it's nowhere near its own all-time highs, and neither are the gold miners.

Let's check the dollar - how does the anti-gold's performance look like?

The greenback has been plunging to new 2020 lows for many weeks recently. Since spring, I have been calling for the dollar to roll over, and comparing the 2008 gold selloff to the March deflationary episode on June 22 in the article titled The S&P 500 Wall of Worry Got Steeper on Friday - please see the From the Readers' Mailbag section.

Yes, I think that the great discounted entry opportunity is behind us. But that doesn't mean gold won't move lower. Barring a true liquidity crunch with a black swan accompanied by a steeply rising USDX, such downswing wouldn't get too far (as in plenty of hundreds of dollars) in my opinion.

The dollar chart shows there is a potential for the dollar bulls to come alive to a certain degree though. In the current environment of indiscriminate money printing as far as the eye can see (the corona hockey stick is first of its kind, putting QE1 to shame), how far would the dollar make it? Regardless of any precise number, that would likely usher in a soft patch in gold.

Correlation of gold to the greenback changes over time, both in its strength and in its direction, making it worthwhile to zoom out and connect the dots. That's exactly what the following chart with its exhaustive caption does:

The Q2 and Q3 2018 bear in gold was vicious, coinciding with Fed hiking rates. The tightening policy (yes, those distant days of shrinking Fed balance sheet) was being increasingly called into question, and the December 2018 FOMC was the last hooray of the hawks.

As you can see, the gold market called the bluff earlier, and as the central bank turned rather neutral, the yellow metal posture was turning increasingly bullish in late spring 2019. Both gold and the dollar were rising at the same time over the summer. The next key event was the repo market turmoil in autumn 2019, and it saw gold declining as the Fed injected liquidity. The can was kicked further down the road.

The real economy seemed strong, yet deteriorating credit markets against new S&P 500 highs in February 2020 showed that appearances can be deceiving. Gold welcomed the uncertainty, and after overcoming its March selloff, it reacted to Fed balance sheet expansions and very unorthodox monetary policy almost as much as it did back in the 1970s when money aggregates mattered more than in our MMT era.

The key thing though is that since the August 2018 bottom, gold amplified each setback the dollar met. The current pace of advance shows just how much it anticipates the inflation in the pipeline to hit. And that's precisely what makes it vulnerable in the very short-term.

What I miss though, is a credible catalyst to bring it down considerably. My June 22 expectations of its bright future are still valid, and I expect the yellow metal to move to new highs sooner rather than later.

Yes, I look for any potential selloff to be brief and shallow, retracing a mere portion of this summer's gains. Consider yourself blessed if it reaches beyond these levels.

Summary

Summing up, the S&P 500 upswing goes on with the full support of the credit markets. As technology assumed the sectoral rotation leadership, the S&P 500 market breadth deteriorated - but both the smallcaps and emerging markets are largely standing their ground. The bulls remain well positioned to overcome the incoming jobs market data trepidations, and welcome the stimulus cheerfully.

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Available to premium subscribers only.

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