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You may ask whether the S&P 500 rebound has stalled, or is that just a healthy consolidation - to which I would reply that the market is merely digesting gains from its sharp upside reversal. In the battle of narratives, the corona second wave fears still play second fiddle to the recovery hopes, and especially the many programs that push for it. Can the aftermath of today's unemployment claims derail the unfolding stock upswing? Again, I don't think so.

Yes, I think that the grind higher in stocks remains on - sometimes slow, and sometimes not so slow.

S&P 500 in the Short-Run

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

The stock bulls continue enjoying the upper hand, and yesterday's red candle doesn't really change that. The volume says there is no conviction in the drive for lower prices. True, it might look superficially convincing to the bears, especially coupled with Tuesday's upper knot.

But to me, this is just establishing a higher base after yet another decisive Fed move. Make no mistake, buying individual corporate bonds is huge - they can sit on the Fed's balance sheet for as long as the central bank wants them to. After the many instruments on their table already, this is just as close to buying stocks or their ETFs outright as it gets. By the way, Bank of Japan already does that, and the Fed might follow one day.

The daily indicators are positioned constructively for the stock upswing to continue - at this point, I am waving off concerns that they might show bearish divergences by making lower highs next. A pattern in progress is just that - not completed. And besides, the other considerations have the potential to overweigh that.

Look how far the bears got with the bearish wedge breakout invalidation and the island top reversal - the consequences have overwhelmingly played out already. True, we're in the summer doldrums for stocks - and I earlier called for quite some sideways trading over these months. I continue to think that this would serve just to build a strong base, a launch pad if you will, to catapult stocks higher when they're ready for such a move.

These were my yesterday's points about the momentum:

(...) The speed with which prices cleared the 61.8% Fibonacci retracement, is lending credibility to the bull market thesis. It's not unexpected that a sharp plunge of Thursday's caliber gives way to a brief consolidation that attempts to move the market either way, eventually followed by similarly sharp rebound. That's a fitting description of what we have seen on Monday and yesterday.

But how come the overnight S&P 500 price action still has the downside flavor to it?

To answer, I'll quote from the intraday Stock Trading Alert issued earlier today:

(...) and the risk-off bias continued throughout the Asian session. China's central bank reverse repo rate cut was overshadowed by poor Australia jobs data.

In light of the above, it's encouraging to see that the S&P 500 recouped its overnight losses. Encouraging and not at all unexpected, that is. The technicals remain arrayed behind the stock bulls.

Moving back below the 3100 mark in the runup to the unemployment claims, doesn't change that. I think that the market will yet again shake off another 1,000K+ figure, and focus on its interpretation of the overall jobless claims trajectory and way less than bad Philly Fed Manufacturing data during the regular trading session.

What would the credit markets say to my bullishly leaning opinion?

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) moved lower yesterday, but what about the volume? Who would trust such a low one to base one's short- or medium-term trading decisions on it?

Take a look instead at the sizable early April gap and the trading action that followed next. There were some downside moves, yet amid generally rising stocks. And what about the mid-May non-confirmation as the HYG ETF moved lower while stocks more than held ground? While we're not at such an advanced stage of Monday's Fed move digestion, it pays to remember that lesson already.

A picture speaks a thousand words - high yield corporate bonds to short-term Treasuries (HYG:SHY) are indeed getting a bit ahead of stocks in their downside move. While we're at the opening phase of absorbing the Fed's decision, I continue to think this will serve well the higher base-building efforts that would launch stocks higher in the future. I certainly don't think we're rolling over to a new bear market with power to approach the March lows.

The short-term Treasuries' chart (IEI ETF) isn't breaking to new highs, which would indicate strong risk-off sentiment. This assessment is more pronounced when looking at long-dated Treasuries (TLT ETF), and can be reasonably applied to the very short-term ones (SHY ETF) too.

In short, the bond markets aren't questioning the recovery storyline, and are still more sensitive to the money spigots than hair-raising corona stories. I'm not arguing for a V-shaped recovery here, I just think that less bad is the new good as stocks are bought amid the prevailing real economy uncertainties (just when and how much will it rebound with some veracity?) and stimulus efforts as far as eye can see.

The stocks to Treasuries ($SPX:$UST) ratio confirms the above, revealing that we're still in an uptrend. In other words, the stock bull run has legs, and all we're witnessing, is a short-term consolidation after the ratio got taken down a peg or two on Thursday.

Needless to say, the action remains healthy despite the many clouds on the horizon, and I think it'll translate into what bull markets do - they keep climbing a wall of worry.

From the Readers' Mailbag

Q: Market correction lasts 3 days? And bear market lasts one month? That's definitely something new for market. Some people say that this time it's different.

A: If you look carefully at the April and May downswings, that has actually been the case precisely. Sideways trading if not an outright upswing breaking above previous local highs, is what followed. I've been saying that market action which decades ago took months or weeks, takes weeks or days in our era. With our markets being increasingly AI-driven, the everlasting human emotions of fear and greed are taking a shorter path in being reflected in prices.

A bear market that shaves off almost 40% of the S&P 500 value in six weeks? It just happened, and we're in a bull market now. Or can you show me a single instance of when stocks overcame the 61.8% Fibonacci retracement off their lows only to plunge below them later again, apart from the post-WWII bear market? There is none.

Summary

Summing up, despite yesterday's pause, the risk-on sentiment appears set to return as the credit markets keep discounting Monday's Fed move, and are actually non-confirming the stock upswing on a very short-term basis. But we've seen similar behavior with the April $2.3T bombshell already, which is why the S&P 500 has a solid chance of extending gains down the road. Treasury yields aren't questioning the rebound story as buy-the-dip mentality in stocks keeps having the upper hand regardless of the perils and uncertainties.

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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Available to premium subscribers only.

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Available to premium subscribers only.

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With yesterday's hefty gains taken off the table, and a new profitable position that has them secured already, will the S&P 500 let me add to the tally some more still today? Given yesterday's Powell-testimony-induced wild swings and preceding strong retail sales data, it's not unimaginable that we're in for another enjoyable ride today as well.

Yes, I think that the grind higher in stocks remains on, slow or not so slow.

S&P 500 in the Short-Run

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

As I looked for them to do, the stock bulls reasserted themselves, and the open long position profits kept growing post the Fed individual corporate bonds buying announcement, and I walked off with an almost 140-point realized profit as Powell didn't catapult stocks immediately higher. Worry not, my other open trade has been unfolding favorably as well, having ended with a 24-point gain!

But what about the daily chart?

The speed with which prices cleared the 61.8% Fibonacci retracement, is lending credibility to the bull market thesis. It's not unexpected that a sharp plunge of Thursday's caliber gives way to a brief consolidation that attempts to move the market either way, eventually followed by similarly sharp rebound. That's a fitting description of what we have seen on Monday and yesterday.

Such were my yesterday's observations:

(...) Reflecting upon the rebound's veracity, the still bearishly looking daily indicators are likely to turn much more positive for the bulls quite soon. Yesterday's volume also gives no reason to doubt the reversal, showing that buy-the-dip mentality won the day.

Should this paradigm hold, then the price consequences of the bearish wedge breakout invalidation and of the island top reversal, would be over pretty soon. I wouldn't be too afraid of stocks approaching the lower border of Thursday's bearish gap, or even of prices moving back near the declining support line connecting the March and May lows.

I consider these technical features as short- to medium-term challenges to the stock bull market, that the bulls would overcome. In other words, I treat the bull market as intact, and merely undergoing a healthy correction that wouldn't result in much technical damage.

They remain valid also today - and with the improving posture of the daily indicators, even more so. Yesterday's volume is certainly consistent with the daily consolidation hypothesis, meaning that stocks can continue higher.

What's the credit markets' opinion?

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) gapped strongly, but gave up much of their opening gains as the Powell testimony kicked in. I would read the daily setback suffered as just that - a daily setback, and not a reversal. The volume doesn't point to corporate bonds moving lower, and their uptrend remains entrenched.

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) - keep moving higher, with the less risk-on one (LQD:IEI) being in the driver's seat. The stock bulls have a reason to cheer both moves.

The HYG:SHY ratio with overlaid S&P 500 (black line) shows that stocks aren't getting ahead of themselves. Now that we have checked the closeness of their mutual relationship, the key question is of course the short-term path of both the ratio (with the HYG ETF being its arguably key determinant) and stock themselves.

In my opinion, that remains overall higher despite the many clouds on the horizon. After all, that's what bull markets do - they climb a wall of worry.

Key S&P 500 Sectors in Focus

Technology (XLK ETF) isn't too far from its early June highs, with semiconductors (XSD ETF) keeping pace. Healthcare (XLV ETF) has some more work left to do on the upside, which is similar to the financials (XLF ETF).

The performance of the stealth bull market trio of energy (XLE ETF), materials (XLB ETF) and industrials (XLI ETF) hasn't been spectacular yesterday, but remains consistent with the unfolding upswing.

The many sectors are working to repair Thursday's damage, and technology with semiconductors is leading to the upside - it's as simple as that.

The stock bull market is still young, and far from a top.

Summary

Summing up, risk-on sentiment ruled yesterday's premarket session, and eventually recovered from the Powell testimony coinciding with downside volatility. The credit market analysis shows that the upswing isn't getting ahead of itself, and remains likely to continue. Treasury yields have slowly risen again, contributing to the recovery narrative and flight to stocks. Smallcaps (IWM ETF) are on board, leading the S&P 500 higher. This is just as good for the 500-strong index advance as its market breadth or technology's (and semiconductor's) leadership is.

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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