Stocks shaking off whatever comes there way was the essence of my call - and with surprisingly strong non-farm payrolls, the fuse was lit. Rising relentlessly, they broke out of the bearish wedge to the upside. In today's flagship Stock Trading Alert, I'll examine the bull run underway, and present you with a view of quite a few important markets. The growing realization that all the post-corona money printing, stimulus bills, will be hugely inflationary provides us profit opportunities as in the early stages of inflation, many benefit and few pay. Let's welcome them the with open arms.

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

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

The bullish price action is impossible to miss. Respectful volume and a close near the weekly highs - what else can the stock bulls wish for? As prices reached the midpoint of the rising black channel, the weekly indicators still have room to grow before flashing amber.

Friday's key development was the breakout above the upper border of the bearish wedge (thin red lines connecting April tops at its upper border, and May bottoms at is lower border). The move happened on the highest volume since the start of April, and on fundamentally positive news for the real economy. Is the party just getting started, or the fat lady is about to sing any moment now?

Let's recap the fundamentals. Friday's non-farm payrolls turning positive instead of merely decelerating as was the case with manufacturing and others recently, is a strong kick in the teeth for bears, because it shows that the worst of the corona crisis is likely behind the us. I wouldn't count on bad data over the summer as the US economy will go on filling the vacuum and repairing the damage sustained. Yes, it will take time, and stocks have been smelling that for quite a while - less bad will be the new good.

As the real economy goes on the mend, what has the power to derail it? A real flashpoint of contention between the US and China that the leaders don't back off from while denying each other the opportunity to save face. This doesn't seem likely to become a burning issue any time soon - the elections are far off, there's plenty of time still to play the China card.

The most likely candidate for turmoil generation is the next round of stimulus. The Fed will find it easier to expand its programs, but all the Treasuries to buy must come from somewhere. And if partisanship makes it difficult to pass the several trillion bill the market is looking for, then we have a problem. A short-term one but still.

How large, tailored and timely the fiscal stimulus would be, is a key risk factor for the coming weeks. Think the CARES Act extension et cetera - a misstep here, and we might be facing another unemployment surge (U3, U6 and I'm not even going into the participation rate) later in summer. Not throwing enough new money at the problems is precisely the risk Powell implicitly mentioned when the S&P 500 last declined to the 50% Fibonacci retracement.

So far though, the market is happy and getting more complacent. Some might even say salivating.

However, the key volatility measure, the VIX, is still above its late-February gap. It clearly has some more room to decline before even the bulls would get uncomfortable. As for now, stocks are well-positioned to overcome whatever short-term bump in VIX we see - and regardless of all the riots around, I think the setbacks wouldn't derail the bull. In other words, whatever choppy trading we get over summer (and we will get it), won't end the bull run.

The Credit Markets' Point of View

Despite renewed upswing, high yield corporate bonds (HYG ETF) aren't enjoying a totally smooth sailing. Wednesday's upper knot foretold Thursday's modest decline - and so could Friday's bearish candle. As the volume doesn't fit the reversal description, corporate bonds can take a breather, which would translate into a pullback for stocks. How worrying would that be?

Friday's bearish HYG candle is mirrored in its ratio to shorter-dated Treasuries. But neither this (HYG:SHY) or the other credit market health metric (investment grade corporate bonds to longer-dated Treasuries, LQD:IEI), seem willing to give up much of the latest sizable gains. Both look likely to recover fast, being primed for still more gains.

My key point regarding Treasuries on Friday, was that they're telling us that another push higher in stocks is likely. It indeed happened - take a look how both shorter- and longer-term Treasuries did that day.

The short-term ones kept not too far from their intraday lows, while the longer-dated ones staged an intraday reversal. I wouldn't read too much into it being a sign of lasting stabilization though.

These were my Friday's remarks about the rising yields in Treasuries as they relate to corporate bonds:

(...) I think that this marks the rush into riskier assets, a rotation underway, with the Fed remaining as an ever larger buyer in the Treasuries market, relatively speaking. Treasury yields will thus remain lower than they would have been absent the interventions, and the fiscal deficits will remain serviceable. Unless the bond vigilantes show up one day.

That's what financial repression looks like - everyone is happy, and only the pension funds and people living off fixed income can't get returns that would keep up with inflation. Sure, the outlook for TIPS is better than for other Treasuries, but I guess it's clear.

And it's the prospect of inflation that is working its way through the system, that drives the stock bull run as well. That's why the stock bull market has much higher to run - just think about all the money sitting on the sidelines in bond funds waiting to be deployed, still looking for the other shoe to drop and none is arriving...

Another subtle sign of the run into equities is that corporate bonds aren't likewise crashing or leading to the downside. Conversely, even the safest investment grade ones are holding value much better than Treasuries. And I've already covered the stronger showings of high yield corporate bonds over their safer counterparts.

Let's check the implications of the USD moves.

Given Friday's surprise, the bounce is disappointing. Sure, Thursday's declaration of the ECB's moves drove the common currency higher - and as the EUR/USD has the greatest weight in the USDX, it's felt.

But the key point is not any bigger or better ECB policy step. The greenback has been in a precarious position since the deflationary corona effects gave way to the stronger and stronger reflationary efforts. Reflecting that, I continue to think that the dollar will rather muddle through with a sideways-to-down bias over the coming months.

But this is not about the USDX as such, but about its influence on stocks. The key takeaway is that it won't be an obstacle to rising stocks regardless of the path it takes - down, sideways, or even a bit higher. This means that unless the dollar goes on the offensive, stocks won't come under significant selling pressure.

Inflation is coming, that's what the many asset classes are telling us. These were my parting thoughts on Thursday:

(...) Given the Fed's and fiscal measures taken (they're joined at the hip, because where would all the new Treasuries to buy come from if not from deficits?), the odds favor the Fed to keep at winning this reflationary game right now.

Good for stocks for they don't love many things more than money printing.

Key S&P 500 Sectors in Focus

Technology (XLK ETF) is taking on its February highs, and the only question appears to be how much of a resistance will these levels provide.

The pressure in healthcare (XLV ETF) is building up, and I think a move higher is merely a question of time.

Despite Friday's retracement of almost half of the sizable bullish gap, financials (XLF ETF) have more catching up to do, relatively speaking. As they work on the 200-day moving average, they'll overcome it regardless of the ominously looking latest daily candle on high volume.

Energy (XLE ETF) gapped higher, and extended gains. This is very bullish for the stock market advance.

The action in materials (XLB ETF) is looking even better for the bulls.

Despite the daily reversal, industrials (XLI ETF) defended practically all of their opening gains.

Nevermind that I said as little as about this stealth bull market trio (energy, materials, industrials) as I did. They're moving in symphony higher, no signs of making a top, which means that this bull market has much further to run.

Summary

Summing up, the bearish wedge in the S&P 500 was resolved with a sharp upswing. The weekly and daily charts highlight the bullish outlook, and credit markets including Treasuries support the rotation into stocks, and more buying power to come in from the sidelines. The sectoral performance remains conducive, and the strong showing of the early bull market trio (energy, materials and industrials) underscores that. Without the dollar under pressure and unlikely to stage more than a reflexive short-term bounce, stocks aren't likely to face a new deflationary headwind any time soon. But it's the debt markets' performance that is the cornerstone of my bullish outlook.

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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Something big to move stocks is brewing under the surface - Treasuries are down, the dollar is under pressure, gold refusing to decline much... I think it's the market's growing realization that all the post-corona money printing, stimulus bills, will be hugely inflationary, and the participants are coming to grips with that realization. Will stocks provide a shelter?

S&P 500 in the Short-Run

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

As the S&P 500 was again reaching for new highs, the action attracted more participants. The temperature is rising, and stocks didn't get anywhere yesterday. They're still trading inside the bearish wedge (thin red lines connecting April tops at its upper border, and May bottoms at is lower border) as it's nearing its completion.

I wouldn't write off yesterday's action as a daily consolidation. These were my yesterday's thoughts about the extended daily indicators, stock prospects and fundamental drivers:

(...) e.g. RSI is approaching the 70 level where it months ago used to muddle through before rolling over. For how long can they keep rising day in and day out - is the daily grind higher like clockwork sustainable? I don't think so, as every healthy uptrend needs to be puctured by the occasional sideways or down price action to make it sustainable - indirect Fed support present or not.

Please recall also the February bearish wedge - the predictable measured rise, and what came next. While I don't say that stocks are due such a watershed moment, for such a momentuous plunge with lasting capacity, I expect hesitation, sideways trading and an attempt to push prices lower in what I would describe as an opening stage in the summer doldrums. Yes, we're in a stock bull market but no tree grows to the sky (in one line, stocks especially).

What could drive that fundamentally? A growing realization that the riots are not a several-days' event? That the 9,300 arrests made so far haven't brought it under control? That the rioting goes on regardless of curfews and that more National Guard units are needed? Are the rioters practicing social distancing apart from widespread use of facial coverings? Can't that help bring about some form of the dreaded second coronavirus wave in around 8 weeks? Curfews or lockdowns, what good will that do to economic activity, reopening and small business wanting to just get back on their feet? And what about the potential to play the China card to divert attention from issues at home?

These are serious fundamental risks to the stock advance in the short- and medium-term. Sure, the Fed stands ready to act, and should things start getting out of hand, they will act - and as we've seen during the once-in-a-lifetime reaction to corona getting exponential (not even during the Spanish flu did the economy grind to such a screeching halt, fiat or not), the central bank would sooner of later overrride whatever deflationary forces might have had the upper hand in the short run.

Looking at yesterday's trading only, what events have actually had the power to bring the stock bull down temporarily? First, it was the Trump threat to block Chinese airlines` flights to the US, which also coincided with the intraday upswing in the USD Index. The second fly in the oitment were continuing jobless claims that instead of falling to just over 20,000K, rose to 21,487K. But stocks soon recovered from the shallow sub-3,100 dip.

Overall, it's just about China (remember the runup to Friday's Trump press conference?) and whatever happens with the Fed's printing press.

This is what I wrote as we approached today's non-farm payrolls:

(...) Yesterday's new unemployment claims moved below 2,000K - and the market viewed it as a success (the datapoint's downtrend continues). Sure, the June figures will likely keep getting better, just as May was better than April. Today's non-farm payrolls will likely take a cue from surprisingly strong Wednesday's non-farm employment change, and beat expectations.

That means the economy will be perceived as being on the mend, putting a floor below any temporary S&P 500 downswing we might see shortly - regardless of the daily chart's bearish wedge.

While the S&P 500 hasn't been trading with high volatility, the general air of calmness is deceiving, and a bigger move is about to unfold.

There are several omens that point in the prevailing direction of the upcoming stock move. Enter bonds.

The Credit Markets' Point of View

For the first time in quite a while, high yield corporate bonds (HYG ETF) closed lower, justifying my yesterday's call for a short-term consolidation as a minimum. It wasn't that hard to reach such a conclusion, because of Wednesday's daily reversal candlestick after the preceding prolonged runup.

While the price action is bullish, corporate bonds might attempt to break below yesterday's lows. The volume though says that this is a consolidation, not a reversal, which is why I think the HYG ETF will power higher.

Investment grade corporate bonds (LQD ETF) confirm this opinion, because their decline happened on relatively lower volume. And as the ratio of high-yield corporate bonds to investment grade corporate bonds (HYG:LQD) stood still yesterday, these factors bode well not only for corporate bonds, but also for stocks.

In line with the above observations, yesterday's downswing in high yield corporate bonds to short-term Treasuries appears as merely a blip on the daily screen that stocks largely ignored.

That doesn't mean though that stocks might not be getting too complacent. At least, that's what the favorite volatility measure, the VIX, says:

Refusing to move lower much further, stocks declined a little in response. If you look carefully at VIX, you'll see that it's been also trading in a wedge pattern - this time, in a bullish wedge. And as breaking below its lower border hasn't succeeded for two days in a row already, what does that mean? Rising volatility in all likelihood. And I think that the bears will be surprised by the prevailing directional move.

Are Treasuries trying to tell us that the rising volatility would come on the heels of another push higher in stocks? Looking at the two charts below, that's what I indeed see.

Treasuries are falling down across the board, which means that yields in the deepest of safe-haven markets, are rising. I think that this marks the rush into riskier assets, a rotation underway, with the Fed remaining as an ever larger buyer in the Treasuries market, relatively speaking. Treasury yields will thus remain lower than they would have been absent the interventions, and the fiscal deficits will remain serviceable. Unless the bond vigilantes show up one day.

That's what financial repression looks like - everyone is happy, and only the pension funds and people living off fixed income can't get returns that would keep up with inflation. Sure, the outlook for TIPS is better than for other Treasuries, but I guess it's clear.

And it's the prospect of inflation that is working its way through the system, that drives the stock bull run as well. That's why the stock bull market has much higher to run - just think about all the money sitting on the sidelines in bond funds waiting to be deployed, still looking for the other shoe to drop and none is arriving...

Another subtle sign of the run into equities is that corporate bonds aren't likewise crashing or leading to the downside. Conversely, even the safest investment grade ones are holding value much better than Treasuries. And I've already covered the stronger showings of high yield corporate bonds over their safer counterparts.

But there is more.

The USD Index is rolling over as I called for it to do later this year, and I think we're witnessing the opening stage. While the daily indicators are conducive to a rebound, and so is the vicinity of a major rising support line (the 200-week moving average on the USDX weekly chart, currently at 96.27), I think the greenback will rather muddle through with a sideways-to-down bias over the coming months.

But this is not about the USDX as such, but about its influence on stocks. The key takeaway here is that it won't be an obstacle to rising stocks regardless of whether it goes down, sideways, or a bit higher over the coming months.

Given the strongly positive jobs data arriving (2,509K non-farm payrolls with unemployment rate decreasing to 13.3%), the dollar could have staged a rebound. The fact that it doesn't, is telling, and supports my thesis of the dollar not really rising (there aren't such deflationary pressures anymore) but rather rolling over and going sideways-to-down. This short-term dynamic means that unless the greenback makes really bullish moves, stocks won't come under significant selling pressure.

Inflation is coming, that's what the many asset classes are telling us. These were my parting thoughts yesterday:

(...) Given the Fed's and fiscal measures taken (they're joined at the hip, because where would all the new Treasuries to buy come from if not from deficits?), the odds favor the Fed to keep at winning this reflationary game right now.

Good for stocks for they don't love many things more than money printing.

Summary

Summing up, yesterday's hesitation in stocks went hand-in-hand with a decline in corporate bonds. The bearish wedge meant that the S&P 500 was vulnerable in the short-term to a temporary takedown, regardless of the strong showing of the early bull market trio (energy, materials and industrials). We didn't get much in terms of a temporary pullback in the index, again confirming that we're indeed in a bull market, where money is to be made rather on the long side. While the intraday sectoral dynamics favors much more upside to come, it's the debt markets' performance that is the cornerstone of my bullish outlook.

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

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Available to premium subscribers only.

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Stocks keep reaching for new highs, but the bearish wedge and volume are giving me second thoughts. Stocks are getting ready to move, and today's analysis will paint as clear a picture thereof as it gets.

S&P 500 in the Short-Run

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

Please note the bearish wedge (thin red lines connecting April tops at its upper border, and May bottoms at is lower border) as it's nearing its completion. Stock prices are rising steeply, but seem to be having issues keeping inside the wedge. It's been only yesterday that they cleared the vicinity of the lower border they've been flirting with for several days already. As the volume slightly improved yesterday, one might be forgiven for taking it as a near-term bullish sign.

To me though, it's suspicious, and for one simple reason that I'll tell you about in the following section. First though, take a look at the extended daily indicators (e.g. RSI approaching the 70 level where it months ago used to muddle through before rolling over). For how long can they keep rising day in and day out - is the daily grind higher like clockwork sustainable? I don't think so, as every healthy uptrend needs to be puctured by the occasional sideways or down price action to make it sustainable - indirect Fed support present or not.

Please recall also the February bearish wedge - the predictable measured rise, and what came next. While I don't say that stocks are due such a watershed moment, for such a momentuous plunge with lasting capacity, I expect hesitation, sideways trading and an attempt to push prices lower in what I would describe as an opening stage in the summer doldrums. Yes, we're in a stock bull market but no tree grows to the sky (in one line, stocks especially).

What could drive that fundamentally? A growing realization that the riots are not a several-days' event? That the 9,300 arrests made so far haven't brought it under control? That the rioting goes on regardless of curfews and that more National Guard units are needed? Are the rioters practicing social distancing apart from widespread use of facial coverings? Can't that help bring about some form of the dreaded second coronavirus wave in around 8 weeks? Curfews or lockdowns, what good will that do to economic activity, reopening and small business wanting to just get back on their feet? And what about the potential to play the China card to divert attention from issues at home?

These are serious fundamental risks to the stock advance in the short- and medium-term. Sure, the Fed stands ready to act, and should things start getting out of hand, they will act - and as we've seen during the once-in-a-lifetime reaction to corona getting exponential (not even during the Spanish flu did the economy grind to such a screeching halt, fiat or not), the central bank would sooner of later overrride whatever deflationary forces might have had the upper hand in the short run.

Despite the relative S&P 500 stability, these are the times fraught with risk. Drums up please for the simple reason why I think so - enter the credit markets.

The Credit Markets' Point of View

After the recent string of rising prices, high yield corporate bonds (HYG ETF) formed a daily reversal candlestick. As a minimum, that spells a short-term consolidation soon - regardless of the volume not rising much at all beyond its recent values. While the daily indicators are extended, the momentum of last weeks can take bonds in the very short-run higher still - even as the RSI is solidly above 70 now.

While likely of fleeting shelf life, yesterday's high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) hesitation is a short-term warning sign, because it has recently been this metric that led stocks higher, and not vice versa.

Having said that, I still expect the credit market metrics (including investment grade corporate bonds to longer-dated Treasuries, LQD:IEI, that barely erased yesterday's intraday losses) to support the stock uptrend to reassert itself after whatever kind of consolidation (including the potential one a tad sharper for the bulls' taste) comes.

Just take a look at the below stocks to Treasuries ($SPX:$UST) ratio as it's breaking out to new highs.

That looks to me much more like an inflationary storm to come than another deflationary episode. Given the Fed's and fiscal measures taken (they're joined at the hip, because where would all the new Treasuries to buy come from if not from deficits?), the odds favor the Fed to keep at winning this reflationary game right now.

Key S&P 500 Sectors in Focus

Technology (XLK ETF) made another high, but the daily volume is drying up. While prices are primed to go on rising, that's a short-term watchout. I wouldn't be too afraid of the extended daily indicators here, because prices have been strongly trending higher without really making lower lows (let alone lower highs). Realistically, a short-term pullback is the best the sellers can hope for.

Healthcare (XLV ETF) is hesitating in the short-term, but also remains primed for more gains - they just likely won't be as meteoric as in the case of tech. Yesterday's red candlestick in healthcare also raises the likelihood of short-term headwinds in stocks.

A strong daily upswing coupled with a bullish gap in the financials (XLF ETF) - but will another move higher along the late-May lines follow? I don't think it's likely right now. Rather, this could mark a short-term top drawing near, especially given the potential for the HYG ETF to digest its strong recent gains first.

The stealth bull market trio - materials (XLB ETF), energy (XLE ETF) and industrials (XLI ETF) - moved sharply higher yesterday. That's certainly positive for the stock market bull as such, but when these three top, the calls for an S&P 500 topping process well underway intensify.

Applied to the situation at hand, they don't appear to be making a top here, and the young stock bull market remains intact.

From the Readers' Mailbag

Q: Technical point of view still showing lots of clashes with current rally of bulls run. Elliot wave count shows the similarities with Feb's charts. I guess Fed's interference with crossing the red lines created a chaotic charts that doesn't rhymes with technical fundamentals, What do you think will happen once the guidance is back? All the PE, micro/ macro economics and unemployment currently doesn't have any weight on this rally and how all these will affect future stock prices?

A: Yes, the stock market rally has entered a moment of truth if you will, and I bet on the forces of inflation (i.a. higher stocks) to win sooner rather than later, even if that would mean muddling through the summer and election uncertainties next. Definitely, the serial bombshells dropped by the Fed shortened the duration of the bear market - both the downside and upside moves are happening faster these days. Years and decades earlier, it used to take months for the market to bottom, but now it can be a matter of weeks merely.

Understandably, fundamentals have a hard time keeping pace. Consider the yesterday-mentioned CARES Act job market provisions to expire late in June - unemployment turmoil will return if no action is taken. Similarly, the bankruptcies will take time to cascade through the system. But policy actions are aiming to soften the blow - and that's what stocks count on. They're salivating whatever actual shape the policy measure takes, just gimme the punch bowl and I'll work it out along the way and go on rising, that's what stocks are saying.

The extraordinary P/E ratios will turn in the direction of more normal before inflation strikes. As surprising as it might seem, I would rather look at the P here instead of E - and the P part, that's bullish.

As for the similarity to February, I don't expect anything remotely approaching the corona panic-driven slide - stocks would likely carve out a (relatively shallow) bottom before continuing higher as if nothing happened, bearish wedge or not.

Summary

Summing up, yesterday's upswing is bullish at face value, but signs warranting caution are creeping in again. It's namely the bearish wedge nearing completion coupled with yesterday's weak high yield corporate bonds performance. The sectoral examination reveals that the S&P 500 is vulnerable in the short-term to a temporary takedown, regardless of (and perhaps even in line with the potential for reversal in) the early bull market trio (energy, materials and industrials) upswing yesterday. As we're in a bull market, the balance of risks in the medium-term remains skewed to the upside - in spite of the unsuccessful first attempt at the early March top. Yes, buy-the-dip mentality is back.

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