The battle to break above the early June highs is on, and the bulls are likely to win it more lastingly this time around, thanks to tech earnings. The runup to their aftermarket announcement has been promising, and more gains were added once the numbers came in. Can I turn from merely cautiously optimistic to broadly optimistic now?

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

S&P 500 in the Short-Run

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

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

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

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

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

The Credit Markets' Point of View

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

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

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

S&P 500 Sectors in Focus

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

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

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

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

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

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

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

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

Summary

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

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 good-bye kiss of the line connecting the early June highs indeed meant no farewell at all. Stocks rose in the runup to the Fed, and extended gains in its aftermath. Are the signs that made me merely cautiously optimistic about the bullish resolution, gone now?

The technical picture certainly cleared up with the credit markets moving higher and technology not having a really bad day either. Will its consolidation make it through the earnings report batch later today? Semiconductors hint at a rather constructive outcome, and my yesterday's sectoral observations remain true also today:

(...) Technology is holding up, semiconductors aren't weakening relatively to the sector, and the rotation into healthcare, materials, and industrials is very much on. The defensives (utilities and consumer staples) are also improving their posture. Consumer discretionaries are firm, and financials are getting better relative to the index.

Let's check the other building blocks in the outlook assessment.

S&P 500 in the Short-Run

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

Yesterday's close above the early June highs on rising volume is a bullish turn of events as stocks continue their chop around the horizontal blue line. The Fed didn't really surprise yesterday, and stocks liked the message of continued support - in line with the yesterday-mentioned dynamic:

(...) Regardless of the real action in precious metals (canary in the coal mine), the Fed would err on the side of not fighting inflation too soon. And thus far fighting the deflationary corona effects, the stimulus is winning and being embraced with open arms by stocks.

So, I think that the bears would be getting ahead of themselves expecting a lasting downturn right now - I treat the consolidation as one with a higher likelihood of a bullish resolution than a bearish one.

Today's frightening advance Q2 GDP and poor unemployment data are likely to be brushed aside during the regular session's trading - I see the focus as being rather on the upcoming stimulus details and tech earnings.

Let's check the credit market performance.

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) regained ground yesterday, and on promising volume. The Fed didn't disappoint, and the sideways consolidation has indeed been resolved with an upswing. The move higher is confirmed by rising investment grade corporate bonds (LQD ETF). The pre-Fed gyrations appear to be over, and with the settling dust, I look for a renewed uptrend.

Both the 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 moving in lockstep again. The short-term weakness is about to give way to another advance in my opinion.

The overlaid S&P 500 closing prices (black line) reveal the extent of stocks taking the cue from the HYG:SHY ratio. The 500-strong index is recovering from its recent soft patch, and is ready to extend gains in case HYG:SHY moves up again. And the ratio's upcoming rise isn't a far-fetched idea. The similarity to its early July chop is again being resolved with an upswing.

Smallcaps, Emerging Markets and S&P 500 Market Breadth

The Russell 2000 (IWM ETF) is trading with solidly bullish undertones. Yesterday's rising volume brought its closing prices farther away from the 200-day moving average, and smallcaps continue trading closer to their early July highs than the S&P 500. Such a very short-term outperformance can turn into more than a few days' affair, benefitting the stock bulls broadly.

Mirroring the technology consolidation in a way, the emerging markets (EEM ETF) aren't going pretty much anywhere. The fact that they aren't selling off though, points to a floor below stock prices these days.

Volatility ($VIX) has moved to the lower border of its falling wedge, and doesn't scream that an upside breakout is knocking on the door. As a result, it won't likely influence the prevailing direction in stocks much. And that points to the S&P 500 upswing continuation.

Summary

Summing up, yesterday's S&P 500 rebound rekindled the bullish spirits, and the credit market posture coupled with market breadth improvements (both the advance-decline line and advance-decline volume are encouraging) reflect that precisely. Expecting the stimulus details, stocks are likely to shake off yesterday-mentioned fundamental risks and leave the effects of stalling job market and horrific GDP decline in the rear view mirror. With the Fed perceived as having the markets' back, the path of least resistance still remains chiefly higher. Today's tech heavyweights' earnings will be THE bellwether speaking with a decisive tone, and I keep being cautiously optimistic.

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.

• Read more

Available to premium subscribers only.

• Read more

Available to premium subscribers only.

• Read more