Helped by the financial sector headlines, stocks reversed higher yesterday - is the downside move drawing to a close? It might look so, but I'm not convinced yet. Despite the generally positive S&P 500 performance during the runups to Independence Day, the new Fed rules might not have saved the day yet. Trading remains choppy, corona cases just made a new U.S. daily high, and the elections are getting closer.

The quarter is ending, and that brings about portfolio rebalancing - either to lock in profits to show off Q2 performance, or keeping the percentage allocated to stocks at Q1 levels after stocks' stellar rise this quarter (in other words, selling some). Just how much have these factors been behind the very short-term S&P 500 moves? Will the bulls invalidate the bearish breakdown from last days' consolidation?

S&P 500 in the Short-Run

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

Half of Wednesday's plunge has been erased, but the volume didn't stand out on a daily basis - this could however change should follow-through buying lift prices later today.

Such were my thoughts about the daily indicators yesterday:

(...) while it's not unimaginable to see them stabilize for a few sessions, such behavior would only make the next bear raid likely.

Let's get into the catalyst of yesterday's move - the Fed's pronouncements regarding the banking sector. Unsurprisingly, banks were found to be in a strong position overall, yet Q3 dividends capped and share repurchases on hold. This piece of the puzzle has been of the buy-the-rumor-sell-the-news variety, but the intended Volcker rule relaxation really did lift the bullish spirits.

While such steps tend to boost the markets in the short run, they don't have as bullish an impact as e.g. the 2009 FASB rule on recognizing losses did. Accounting for yesterday's upswing, I view the short-term balance of forces as rather balanced.

Let's quote from the intraday Stock Trading Alert as the regular session moved beyond its first half :

(...) We're seeing a daily consolidation after yesterday's sizable downswing, and it would be yet premature to ascribe it a bullish meaning.

What are the scenarios I am looking for in the very short run? Moving back below the above-mentioned intraday mid-range (with more selling to come), or muddling through around / peeking above the upper part of that intraday range (3010 to 3050).

The narratives are still there, now also with more Texas reopening on hold.

The S&P 500 is peeking higher in today's premarket trading and trades at around 3070 as we speak, but the sentiment doesn't favor either side thoroughly as the put/call ratio's 5-day average shows. Stocks are also giving up the premium in their returns compared to bonds on a 20-day basis, which could bring us more risk-off environment over the coming weeks. If the S&P 500 200-day moving average doesn't hold, the bears' gains could become substantial.

But would it make sense to wait for the potential downside and endure more Q2 window dressing and light-volume trading around Independence Day, which is notorious for wild swings?

Let's step back and check the weekly chart - after all, today is the week's last trading day. Is it as important as the tense atmosphere suggests?

Quite some seesaw trading in the two prior weeks, with tellingly long upper knots. Should today's close not differ much from yesterday's one (or ideally for the bears, stocks move lower), we could be looking at indecision (if not outright reversal).

Just as the March volume examination showed heavy accumulation, and stock bears unable to reassert themselves right next, last weeks' trading smacks of distribution, of selling into strength. Yes, that's the result of the bulls being unable to stage a comeback this week (so far - we'll soon learn, but the odds favor a downside move).

The thorn in the bears' side is that prices are still trading above the 50-week moving average (roughly corresponding to the 200-day moving average on the daily chart, at 3010 and 3020). Breaking below this support would likely lead to accelerated selling, but we're having none of this so far.

What about the bullish side of the argument? It's about moving prices back into the rising black trend channel - again, we aren't seeing any of this.

The weekly indicators are looking fairly extended, which wouldn't be an issue - but the weakening uptrend in CCI or the RSI continuously unable to overcome its neutral readings, is.

So, these are the reasons why I think yesterday's financial sector news isn't a real game changer, and why I see persisting risks to the downside. True, they might not materialize in the very short run, but the reward potential is higher for the bears here, the longer the above issues persist.

Let's feel the short-term pulse of the credit markets now.

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) made a U-turn on those financial sector headlines, but the upswing wasn't wildly bought. That's short-term suspicious as the downtrend of recent days hasn't been broken, and corporate junk bonds still trade precariously close to the horizontal support line made by its recent lows.

Both the investment grade corporate bonds to the longer-term Treasuries (LQD:IEI) ratio and the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) have stopped bleeding for one day. Does it qualify as a turnaround? That's too early to say would qualify as a safe answer, but I just don't think this is a reversal just yet.

I still stand by the call for rougher trading over the summer. Look, elections are drawing nearer, the polls are showing... whatever - what would happen once the markets start discounting the prospects of Biden presidency more? Markets hate uncertainty, and the Trump years brought us many pro-business policies. Will they continue? What new ones would take their place?

As summer progresses, that could influence stocks more than corona / lockdown fears. The markets would tell us as we go. As I showed you on the weekly chart, the risks are skewed more to the downside in the short- and medium-term.

Are stocks serious about wanting to lead the HYG:SHY ratio higher? For how long would this outperformance last, and will it end up better than it did twice already in early June? Currently, I still have my reservations.

Volatility appears fighting a short-term uphill battle to me. I don't think it would stay this low in July or August.

The market breadth indicators have now flipped to the bullish side in the short run, and have more room to grow. But are the bulls strong enough to achieve that? I don't see a proof for that. Conversely, I expect a more risk-off period to rule in the coming weeks, and USDX continuing its crawl higher just compounds the downside risks.

From the Readers' Mailbag

Q: What do you think of the last couple of hours price increase? Changing direction or would you see it as a fake?

A: Well, every move is real, very real in terms that it's not "on paper" but directly influences the open position if any. Whether that move is credible, is another story entirely. For the above-mentioned reasons, I think we haven't seen a real change in direction yesterday, that doesn't pass the smell test for me.

Q: I'm a little disappointed to be honest. I trade by zones, and while everything indicated another test to the 3000 zone it broke the upper zone based on the banking stress test (which i find it as an excuse for manipulation). I will switch to trade something that moves more reasonable or justifiable such as eur/usd, gbp/jpy, or usd/jpy.

A: You're right that a serious test of the 3000 area was on the cards, practically speaking. Yet, the market made a short-term turn, and you're very right in seeing the visible hand of the financial sector headlines. But has it flipped the outlook to bullish again? Not yet, as some market breadth views are the strongest indicator going for the bulls these days - but even the weekly view reveals the risk of the advance-decline line building a bearish divergence (unless stocks rally strongly today and next week, a lower high is guaranteed).

Nobody likes whipsaws, but I can assure you that short-term forex moves can deal you more of them than stocks. International money flows including currency swaps do exert much more influence over $6.5T a day market place than they do over stocks.

Summary

Summing up, the bulls awakened courtesy of the financial news announcements, but the short-term outlook remains unchanged vs. the day before. Significant short-term risks persist amid the choppy trading characterizing last two weeks. The medium-term examination favors the bears, and today's closing prices can reveal whether the time has come to really test the bulls' resolve. We're now trading at around 10% off the all-time highs, and given the prevailing narratives' trajectory, more risk-off sentiment is far from unimaginable.

The damage in credit markets isn't repaired yet, technology (semiconductors) don't outshine the rest on a short-term basis, and neither does Russell 2000. Should the market get spooked by corona even more down the road, that would be a cherry on the cake for the bears.

As the saying goes, you're on the right track with stock bulls - but stay there long enough, and you get run over - and the S&P 500 setup these days is precarious.

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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Stocks made quite a move out of the 5-day long congestion yesterday - is the downside move drawing to a close? I don't think so yet, and today's analysis will discuss quite a few reasons why. As for the battle of narratives, the corona fears are gaining the upper hand over the recovery focus currently, which highlights the S&P 500 downside potential in the short-term. Will stocks follow through on the many cues?

And how will the market take to the incoming unemployment claims? I think they would not bring about a bullish surprise, and will likely prove to be a catalyst of selling pressure during the regular U.S. market hours.

S&P 500 in the Short-Run

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

Wednesday's trading resolved the tight consolidation of recent days, and it was to the downside. Volume has picked up, and prices closing near the daily lows lend credibility to the move. So do the deteriorating daily indicators - while it's not unimaginable to see them stabilize for a few sessions, such behavior would only make the next bear raid likely.

Yes, the short-term balance of forces is moving over to the bears' side - just as the reactional sensitivity to narratives.

My yesterday's view of them remains valid also today:

(...) Yes, tensions are running high, and stocks have so far rebounded each time. But we all feel that the headline risk in this data-light week is skewed rather to the downside. Raise your hands if you expect another stimulus this week. That's it.

What are the credit markets saying this moment?

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) took a plunge yesterday, but managed to crawl higher from the intraday lows. Will the high volume of yesterday's session (i.e. increased selling interest) overpower those who decided to step in at those prices? I think the credit markets have the potential to extend the move lower, especially should that push happen during the nearest sessions.

The S&P 500 and the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) are trading more closely aligned now, relatively speaking. But this is not about the short-term red flag through extension - it's now where both of them would go next. The swing structure and unwillingness of stocks to outperform, favors the bears.

To me, volatility doesn't look finished rising just yet. I think that yesterday's upper knot will be overcome on an intraday basis at least, before this metric gets a chance to calm down again.

The market breadth indicators have short-term flipped to the bearish side, and the declining bullish percent index is telling me that the slide might not yet be quite over. We are transitioning to a more risk-off period now, especially given the USDX refusing to budge much, and actually building bullish short-term divergences.

Since mid-Feb, the USD Index has been steadily declining for 3 weeks, and that's almost what we've recently seen too. The mighty greenback might be on the verge of rising some more - take a look at the chart below. Whiff of deflation, anyone?

Key S&P 500 Sectors in Focus

Technology (XLK ETF) keeps hanging quite close to its recent highs, so its yesterday's plunge might not seem that concerning given the swing structure. But its daily indicators spell caution as they look to be forming bearish divergences. Forming is the key word here - they're not finished yet.

But where to look for more clues? Enter semiconductors.

Where technology goes, the index goes. And for technology, semiconductors (XSD ETF) are playing that role. The picture they're painting, is not a short-term bullish one - compare the swing structure of both tech and semiconductors, and you'll see that this leading segment of tech is acting relatively weak now.

That's one more factor in support of the bearish short-term outlook - just as the Russell 2000 (IWM ETF) relative weakness shown below is.

From the Readers' Mailbag

Q: Within the June 11th drop, you can see the angle that is being proposed by the market that is being reproduced today. My current understanding is that we are following the patterns close to the start of a bear market and we are finishing the second part this week.

And what about all red candles in last two weeks - they are of such a fat volume. Doesn't that stink of distribution to you? Oh I forgot, in the long run stonks are bound to rise.

A: The lessons you derive from the angle, is what I arrive at by looking at momentum, candlestick shape and volume. I agree that the short-term horizon has darkened for stocks with yesterday's action, and also agree that the beginnings of selling episodes (bear markets) do come in fits and starts.

Over a longer period of time, the recent volume spikes tell their story, and it's increasingly becoming one of selling into strength. Price recoveries on low volume, are best viewed with suspicion - unless they get a bullish follow through, which just didn't come this week

Q: Fundamental analysis market index S&P500 P/E is currently just under 22, above the LT average of 16. Even with zero ST interest rates, given an expected decline in earnings, the index P/E will continue to rise and then sell off until "fair value" is reached. Fair value could result in a S&P 500 value of 2100-2700, depending on actual earnings and PE.

A: The problem with P/E ratios is, that they are a tool for long-term decision making. The fact that a market is relatively expensive at one moment, doesn't mean that it can't get more expensive a month or a quarter down the road. I don't talk bubbles here, it's just what the market place deems an appropriate valuation given the prevailing circumstances.

Talking bubbles, they can go on longer than most people think - who thought the Dot-Com bubble would burst that late? Or the housing one when anyone being with a pulse, would be eligible for buying a house, 0% money down?

It can take a long time for any bubble to burst, and while living in the era of universal bullishness, pay attention to the white elephants (e.g. tallest skyscrapers, outrageous IPOs) that make you go hmmm. Just sharing timeless wisdom that can be viewed as analogical to why the gold price isn't tracking the money aggregates in circulation...

Q: If asset prices go up, but the cash flows they represent goes down, wouldn't that lead to indifference between the assets and the dollars. The yield are way too low on bonds for anyone to buy except those in the captive market. No one in their right mind thinks inflation will be low enough that yield in bonds or stocks makes any sense. That captive market is huge though. All those countries with trade surpluses, banks, pension funds, ect. looking for safety, but is it actually safe now? If I were a European banker I would probably rather just invest in my home country where I felt I understood the situation better.

A: Yes, the captive market is indeed huge, and corralling is what makes financial repression so efficient. It works by pushing people and institutions farther on the yield curve, This helps support riskier assets (think TINA), and keeping yields artificially low facilitates capital misallocation and zombification of the real economy, decreasing its long-term growth potential.

Q: I bought long puts and didn't try to go long as you did. Never thought a put 4 months away would yield almost 30% profit on a moderate asset plunge. Didn't close it yet, though.

A: That's the world of options, where you consider time decay and volatility - and the volatility projections are working for you nicely. With your time horizon as far as I gather, your pleasant issue would be when to cash in profits. I merely played the possibility for an overnight rebound yesterday, and closed at B/E - that's how it goes with taking momentum / breakout trades. There are many of them, and careful risk management is a must in order to enjoy the profitable opportunities to ride a larger move when it unfolds.

I believe in diversification, the greatest edge - and within one market, that calls for various trading techniques. Trend plays are great to play when we have a trend, but supplementing it with other styles helps improve the equity curve (smaller drawdowns, less volatility of returns).

Summary

Summing up, the risk-off sentiment made a powerful entry on the stage yesterday, tipping the balance of short-term forces towards the bears. The relative resiliency of the credit markets appears likely to be overpowered by the deteriorating S&P 500 market breadth, precarious position of the tech sector with regard to semiconductors, or the plain unwillingness of stocks to outperform the HYG:SHY ratio - not to mention the bearish daily indicator signals the index is sending. The corona fears narrative is rearing its head increasingly more, which presents a clear downside risk for stocks, which are led lower by the Russell 2000, and also helped by oil.

The prospect of a more bumpier ride ahead for the bulls over the summer, clearly remains on.

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

Available to premium subscribers only.

• Read more

Available to premium subscribers only.

• Read more