The S&P 500 recovered from yesterday's premarket slump and tried reaching for Monday's highs again before losing altitude. Have we seen a daily reversal, and if so, how serious is this?

Given for example the weak showing in high yield corporate bonds yesterday, I think that it's now the bears who have the opportunity to show us what they're made of. The price action before the closing bell certainly validated my earlier decision to take the nice long profits off the table.

So, stocks have declined below the mid-June tops, yet are kissing that line again in today's premarket trading. A little breather following the string of five consecutive days of solid gains wasn't really unimaginable, but isn't close to over now?

Birthing troubles or not, I still think the unfolding rally has legs enough to confirm this breakout shortly.

Such were my yesterday's reasons why:

(...) I say so despite the uptrend in new U.S. Covid-19 cases that has many states stepping back from the reopening, rekindling lockdown speculations. I say so despite the Fed having its foot off the pedal in recent weeks, which makes for more players looking at the exit door as the rising put/call ratio shows.

The summer months will be one heck of a bumpy ride, and the bullish picture is far from complete as the lagging Russell 2000 shows. But emerging markets are on fire, not too far from their February's lower high already - Monday's boon in the China recovery story keeps doing wonders. That's wildly positive for world stock markets, including the U.S. ones.

V-shaped recovery being real or not, corona vaccine hype or not, stocks love little things more than the central banks standing ready to act. And the punch bowl isn't about to be removed any time soon. Let's take the most recent Fed policy step, which was the decision to start buying individual corporate bonds. So far, less than half a billion dollars has been deployed to this purpose - but the corporate bond market is firmly holding up nonetheless, with the Fed waiting in the wings.

With the exception of emerging markets consolidating gains yesterday, the above points remain valid also today - and likely throughout this data-light week too.

But let's check upon yesterday's market performance so as to form a momentary, spot-on picture.

S&P 500 in the Short-Run

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

Monday's breakout has given way to yesterday's close back below the horizontal line connecting mid-June tops, but the conviction behind the move lower isn't there at this moment. That's what the low daily volume says.

Both the CCI and Stochastics keep supporting the upside move - it's only the RSI that feels tired. This doesn't concern me that much - it's not flashing a bearish divergence, it isn't languishing at an extreme reading. In short, it doesn't preclude the rally from going on once the current breather is over.

And until I see credible signs that the markets are getting spooked by corona, botched policy responses or anything else, there is little point in acting as if the sky is falling. It isn't the case - to be clear, the time to turn really bearish would come, but we're not there yet.

Whenever markets start acting jittery, it pays to remember the big picture:

(...) Recapping the obvious, stocks are on the upswing after the bears just couldn't break below the 200-day moving average, which means that the momentum is with the bulls now. The daily indicators keep supporting the unfolding upswing, and volume doesn't raise red flags either.

Let's check the credit markets' message next.

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) have broken the string of quite a few daily gains in a row, and closed not too far from their Friday's finish. For a meaningful reversal though, I would like to see much higher volume - it's evident that yesterday's desire to sell doesn't compare to the late June buying spree.

This goes to highlight that Tuesday's setback likely has a limited shelf life.

Notably, the ratio of investment grade corporate bonds to longer-dated Treasuries (LQD:ÏEI) hasn't turned lower yesterday. Neither have the investment grade corporate bonds themselves (LQD ETF). Thereby, the credit markets are telling me that yesterday's setback isn't turning into a full blown concern.

It's true that the ratio of high yield corporate bonds to all corporate bonds (PHB:$DJCB) has seen better days. Will the breakdown attempt below the rising support line connecting its March, April and May intraday bottoms succeed? And if so, will it drag the S&P 500 lower?

Since mid-April, stocks have refused to follow the ratio much lower, and that's an understatement. Stocks are not diving or starting to dive as they did back in February while the ratio was already trending lower. Looking at the real world situation back then and currently, we're better prepared to deal with the challenges now, once the lockdown costs in terms of economic activity and human toll have become apparent. There is less appetite for that, thankfully.

Therefore, I think that once we see policy misstep risks removed (it's not just about the Fed returning among the buyers. Trump's Mount Rushmore speech helps recall the values and inspiring successes of prior generations, so I naturally wonder about the upcoming stimulus plans), the ratio will turn higher again so as to support the stock upswing that got a little ahead of itself recently when viewed by this metric alone.

Smallcaps, Tech and Other Clues in Focus

The Russell 2000 (IWM ETF) keeps underperforming, and turned lower yesterday to a greater degree than the S&P 500 did. That doesn't bode well for the short-term.

Technology (XLK ETF) also turned down yesterday, yet the downswing's volume was lower than that of the preceding upswing. Coupled with the semiconductors not having retreated to such a degree, that's a short-term bullish sign, and it does outweigh the Russell 2000 non-confirmation.

Volatility ($VIX) has slightly risen yesterday, but the dollar having again stalled is supportive for stocks.

Such were my thoughts about the short-term flies in the bullish ointment:

(...) Nothing unsurmountable, and definitely not overshadowing improving market breadth in the S&P 500 or the still very low bullish sentiment that can power stocks higher - you know what they say about the times when everyone moves to the same side of the boat...

Summary

Summing up, yesterday's decline in the S&P 500 appears merely of short-term nature, as the credit markets show there is no real willingness to sell. Investment grade corporate bonds are trending higher, and the one-day decline in high yield corporate bonds has only so much power to rock the bullish boat. I look for the breakout above short-term resistance formed by the mid-June tops to succeed shortly, and the rally's internals including emerging markets, semiconductors and the dollar keep supporting more gains to come.

If you enjoyed the above analysis and 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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Since Monday's premarket open, the S&P 500 was steadily rising before stabilizing above the mid-June tops. While the index comfortably closed at its intraday highs, can we trust this breakout? While a little breather following the string of five consecutive days of solid gains isn't unimaginable, I think the unfolding rally has legs enough to confirm this breakout shortly.

I say so despite the uptrend in new U.S. Covid-19 cases that has many states stepping back from the reopening, rekindling lockdown speculations. I say so despite the Fed having its foot off the pedal in recent weeks, which makes for more players looking at the exit door as the rising put/call ratio shows.

The summer months will be one heck of a bumpy ride, and the bullish picture is far from complete as the lagging Russell 2000 shows. But emerging markets are on fire, not too far from their February's lower high already - Monday's boon in the China recovery story keeps doing wonders. That's wildly positive for world stock markets, including the U.S. ones.

V-shaped recovery being real or not, corona vaccine hype or not, stocks love little things more than the central banks standing ready to act. And the punch bowl isn't about to be removed any time soon. Let's take the most recent Fed policy step, which was the decision to start buying individual corporate bonds. So far, less than half a billion dollars has been deployed to this purpose - but the corporate bond market is firmly holding up nonetheless, with the Fed waiting in the wings.

That's just one of the factors going for the stock bulls, and today's analysis will deal with yesterday's market performance so as to form a momentary, spot-on picture.

S&P 500 in the Short-Run

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

If I had to pick just one chart for today, this one would cut it. Having broken above the mid-June highs, the S&P 500 closed strongly. But it's also true that it has been languishing below 3170 despite reaching this level at the onset of European trading already, unable to extend gains during the regular session.

Recapping the obvious, stocks are on the upswing after the bears just couldn't break below the 200-day moving average, which means that the momentum is with the bulls now. The daily indicators keep supporting the unfolding upswing, and volume doesn't raise red flags either.

The breakout above the blue horizontal resistance line stands a good chance of succeeding. That's true regardless of the S&P 500 futures dipping below 3145 as we speak. It's that the majority of signs speak in favor of the upswing to continue, short-term breather to come or not.

Crucially, do the credit markets agree?

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) are clearly rising in unison with the S&P 500. So far so good, the daily indicators are reflecting that positively, and the volume doesn't smack of an impending reversal. In short, there are no clouds on the junk corporate bonds chart horizon.

And it's not just investment grade corporate bonds that are powering to new highs. The ratio of high yield corporate bonds to all corporate bonds (PHB:$DJCB) has bottomed at the rising support line connecting its March, April and May intraday bottoms. The question remains whether it will turn higher next so as to support the stock upswing that surely appears getting a little ahead of itself when viewed by this metric alone.

But it can't be denied that risk is staging a comeback into the market place, albeit a painstakingly slow one.

Or isn't it that slow when we examine the performance of technology, and other clues?

Technology and USDX in Focus

The tech sector (XLK ETF) keeps making new highs, and the volume remains quite healthy and free from bearish implications. The sector continues leading the S&P 500 higher, and perhaps most importantly, its internals have improved yesterday.

Enter semiconductors.

While they are not yet at their early June highs, semiconductors (XSD ETF) are within spitting distance thereof. The technical posture has improved with yesterday's show of strength, and as the segment leads the whole tech, that means a lot.

The flies in the short-term bullish ointment are volatility ($VIX) refusing to stick to its intraday move lower, another black daily candle in smallcaps (IWM ETF) or greenback's overnight upswing attempt.

Nothing unsurmountable, and definitely not overshadowing improving market breadth in the S&P 500 or the still very low bullish sentiment that can power stocks higher - you know what they say about the times when everyone moves to the same side of the boat...

Summary

Summing up, the S&P 500 broke above short-term resistance formed by the mid-June tops yesterday, and the rally's internals keep supporting more gains to come. Importantly, emerging markets and semiconductors sprang to life yesterday. Signs are though mostly arrayed behind the bulls, and most importantly, the credit markets continue supporting the unfolding stock upswing regardless of Monday's intraday wavering that could foreshadow some short-term sideways moves. The key word is could - S&P 500 market breadth is getting better while the sentiment remains too bearish to enable a sizable downswing attempt to succeed. What else can the bulls wish for?

If you enjoyed the above analysis and 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 StrategistSunshine Profits: Analysis. Care. Profits.

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Supported by another strong ADP non-farm payrolls, the S&P 500 extended its premarket rally on Friday, but it quickly ran out of steam. How concerning is seeing most of its intraday gains gone? That's actually not the only sign of short-term non-confirmation. Should the bulls be getting concerned here?

There are still more factors going for this rally than against it. In today's analysis, I will present these together with the non-confirmation signs.

Credit markets are still on the upturn, stocks are undaunted by the rising U.S. Covid-19 cases and hits to reopening plans across many states.

This dynamic is still at play, and I think the bullish bias to the S&P 500 outlook will deal with the above-mentioned signs of caution in a relatively short order.

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

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

Last week, the S&P 500 rebounded off the 50-week moving average, and closed not too far from the weekly highs. Yet, Friday's attempt to overcome previous two weeks' intraday tops, was rejected. So far rejected.

While the weekly indicators appear tired, that wouldn't be a concern for the stock upswing to continue. The volume doesn't raise red flags either - had Friday not been a bank holiday, the weekly volume would be more than adequate with its average daily addition. But it must be said that the weekly chart is bullish-to-neutral in its implications.

The daily chart shows that the bulls were again rejected on Friday at the blue horizontal resistance line. Still, I would not consider the latest candle as one characterizing a reversal - and not only because of the lower volume. The daily indicators favor the upswing to continue, short-term breather to come or not.

Let's move to the credit markets next.

The Credit Markets' Point of View

Friday's candle in high yield corporate bonds (HYG ETF) mirrored the S&P 500 one, and hints at a daily consolidation - yes, more gains will come down the road, and power stocks higher.

Risk is coming back into the market place - slowly but surely. And it's not just about the PHB:$DJCB (high yield corporate bonds to all bonds) ratio's fledgling uptick from the late June local bottom.

As the above chart shows, investment grade corporate bonds to the longer-term Treasuries (LQD:IEI) are helping the high yield corporate bonds to short-term Treasuries (HYG:SHY) ratio to move higher, and much more still appears to come for both metrics.

The HYG:SHY ratio supports the stock upswing, but with the S&P 500 at late June highs while the ratio isn't there yet, stocks are a bit extended here. While the charts don't favor a reversal, a sideways consolidation for a few days wouldn't be all too surprising - especially should the credit markets stall.

S&P 500 Market Breadth, Volatility and Other Clues in Focus

Both the advance-decline line and the advance-decline volume are moving increasingly positively for the bulls - and they have ample scope for moving higher. Bullish percent index has remained in bullish territory, and is curling higher again. In short, market breadth indicators are improving with a solid potential for more constructive action.

The favorite volatility metric, the VIX, erased much of its Friday's decline. Is it stabilizing around the June lows, or preparing for a rebound? The stabilization scenario appears more probable.

Smallcaps have suffered two daily setbacks, and continue lagging behind the S&P 500. That's especially visible in the latter half of June, right after their failed breakout above their 200-day moving average. While the S&P 500 is trading comfortably above it (i.e. support held and thus upswing continuation is more likely), the Russell 2000 (IWM ETF) isn't yet. Positive resolution to this non-confirmation would certainly lift the outlook - and I think it's a question of time merely.

The USD Index also paints a rather bullish picture for the coming week(s), and the caption says it all. The greenback won't be standing in the way of a more risk-on environment.

On Thursday, I added these thoughts on the dollar:

(...) Wouldn't you expect a more veracious move on new U.S. daily corona cases highs? Yeah, cases... That's it.

Key S&P 500 Sectors and Ratios in Focus

Technology (XLK ETF) is again moving to new highs, and that's positive for the whole index. Yet, the following semiconductors chart shows that there's something amiss with the strength here (just like with the Russell 2000 message).

Semiconductors (XSD ETF) are lagging behind, also revealing that we're not in a raging risk-on environment yet. That's also the takeaway from the junk corporate bonds to all corporate bonds (PHB:$DJCB) ratio.

The consumer dicretionaries to consumer staples (XLY:XLP) ratio shows that the cyclicals (such as discretionaries or materials) are doing fine. Baltic Dry Index ($BDI) is also rising while the defensive sectors (utilities and staples) aren't at their strongest. That's a subtle hint that the bullish environment for stocks is intact.

Summary

Summing up, given Friday's non-farm payrolls, the S&P 5000 gains could have been bigger, but the index is still taking time to overcome its late June local tops. Signs are though mostly arrayed behind the bulls, and the credit markets support the unfolding stock upswing. The non-confirmation in Russell 2000 or semiconductors underperforming technology will likely get resolved over the coming days or weeks as we see more rotation into cyclical and riskier plays.

The greenback isn't likely to get in the way of further stock gains, and I expect it to rather weaken as the recovery narrative gains more traction - and if you look at emerging market stocks, they've done better over the June consolidation than their U.S. counterparts. Encouragingly, their Friday's upswing has already overcome its early June highs - their outperformance means more gains for the U.S. stock indices as they explode higher again.

If you enjoyed the above analysis and 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