Neither on Monday, nor on Tuesday did we see strong volume, but prices rose regardless -is it time to bet the farm on higher stocks right next? As quite a few yesterday-mentioned reasons to be cautious were resolved bullishly, the buyers' case got stronger.

S&P 500 in the Short-Run

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

Whatever the adverse intraday setup, prices are grinding slowly higher (even if that happens only in the session's last 15 minutes) - regardless of volume that isn't totally convincing. On a slighly bullish note, yesterday's volume didn't at least decline below Monday's levels. Yes, it's true that somewhat lower volume on many days during bull market runs is no reason for concern, but such low ones give a reason to think that more market participants are waiting for more advantageous prices, and are holding off from buying here.

These were my thought about the short-term stock trading path ahead:

(...) Should it break higher from here, and leave the further detailed non-confirmations unresolved, that would be concerning for the short-term prospects of the bull market. With the early March highs at 3137, the upside potential isn't huge - it's roughly the same as any temporary drop below 3000. That's not what I would call either a high-odds setup to reach those highs, or a favorable risk-reward ratio.

(...) Yes, the monthly price action is bullish, and the weekly one is probing a key resistance, but I think it's a matter of relatively short time when the sellers test the buyers' resolve here.

Stocks are surely working hard to extend their gains, and some of the reasons to be cautious, got resolved yesterday. Are they strong enough to justify being invested?

The Credit Markets' Point of View

High yield corporate bonds (HYG ETF) weren't a cause for concern either on Monday or yesterday. The long white candlestick speaks for itself. Volume is not too hot, not too cold - and the price action continues being not merely bullish, but strongly bullish. Have stocks resolved their slight short-time lag behind credit yesterday?

Yesterday's sizable upswing in the ratio wasn't met with a proportional daily increase in stocks. While stocks caught up in yesterday's premarket upswing, the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) outdid them.

Given that stocks are higher again in the premarket session today, the credit markets' gains would be the driver of further stock increases. That's the message as credit markets retook leadership from stocks on a short-term note as well (the medium-term degree of strong interconnectedness is obvious).

The stock bull run remains intact regardless of whatever short-term hiccups the credit markets are going to run into over the coming days and weeks. The market isn't doubting now whether the Fed has its back or not - it has.

Key S&P 500 Sectors in Focus

Technology (XLK ETF) wavered intraday, and just as the S&P 500, the sector moved strongly higher only 15 minutes before the closing bell. The price action is turning more positive for the bulls in the short term (it's common knowledge I'm bullish on the sector in the medium and long run).

Encouragingly, its key segment is leading higher. Enter semiconductors.

Initially, semiconductors (XSD ETF) had issues overcoming its recent highs yesterday, but steadily worked their way higher to close with a buying climax as well.

As a result, the short-term hesitation in the tech sector appears over.

Healthcare (XLV ETF) also erased the daily downswing, and remains positioned for more gains.

The price action in financials (XLF ETF) wasn't as bullish yesterday. On one hand, they could have moved higher thanks to the HYG ETF upswing, but this early in the stock market bull, the sector can't be really counted upon to outperform.

The performance of the stealth bull market trio is supportive of more stock gains ahead. Materials (XLB ETF) and energy (XLE ETF) moved above their recent highs, with only industrials (XLI ETF) lagging a bit behind. The overall impression of these three sectors remains to be one of a slow grind higher in the weeks to come.

The Fundamental S&P 500 Outlook

On a fundamental note, China hasn't really escalated the issues raised during Friday's Trump press conference. After an intraday drop early this week driven by their agricultural purchases reconsiderations, the statement has been largely contradicted by action on the ground. Stocks cheered that, as it appears that it's only China and foremost the Fed's printing press, that are the stock market kryptonites. The window for unreasonable reactions on both sides has rather closed, and the many issues are back on simmer.

Cool heads prevailed and the downside risk was removed, which means more power the bulls.

As for today's ADP Non-Farm Payrolls, they beat estimates to the upside. Given the mayhem in unemployment claims, a loss of 2760K jobs is less bad than the market thought it would be. When the CARES Act job protection provisions run out later in June, I expect renewed higher intial jobless claims figures though. But we're not there yet.

From the Readers' Mailbag

Q: On the daily charts, what do you think about rising bearish wedge which will be completed latest by Friday? Also VIX uptrend since April? It's clear as daylight and seems like no one brings these to their articles. Same rising bearish wedge happened on every major market crash on every major indexes. What do you think is gonna happen after Friday the latest?

A: Yes, the technical formation is in progress, but as it hasn't been activated yet (stocks didn't break down from it yet). The next couple of sessions will be telling. Ideally, I would like to see the index break down only to come back (a good-bye kiss of the wedge's lower border) on distinctly lower volume, to give it a really bearish kick. So would a fundamental catalyst, but I covered the lack of these already. Stocks appear not to be too concerned about riots anymore...

Otherwise, the drop can be resolved with a few dozen points' drop, and proceed to draw a saucer-like bottom (that's similar to the cup-and-handle pattern bottom) before continuing higher as if nothing happened.

As for VIX, the volatility measure seems to be more in a downtrend that's merely punctured by a few spikes here and there.

Certainly stocks look extended at first sight, but remember that most bull runs happen on low volatility. Stocks just rise slower than they fall. Then, I think that the recent downswing means that the S&P 500 is getting a bit too complacent now, and look for this metric to rise eventually. Eventually, that's the key words here, as this gives no clarity to the timing part of your question - markets can stay complacent for long periods of time only to move vigorously faster than you can say Jack Robinson.

Summary

Summing up, yesterday's upswing dealt with quite a few signs of short-term non-confirmation, strengthening the bullish case. The strong showing of the high yield corporate bonds is the strongest bullish factor, and the sectoral examination (technology with focus on semiconductors, and the early bull market trio of energy, materials and industrials) support the view. As we're in a bull market, the balance of risks in the medium-term remains skewed to the upside - despite the proximity of early March top and likely probe of the buyers' strength on that occasion.

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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When it comes to closing prices, stocks entered the month of June on a strong note, but the daily volume wasn't exactly convincing. While many signs though continue to be arrayed behind the slow grind higher, first swallows of short-term non-confirmation are appearing. Which way will they resolve? And what's the upside potential of the stock rally in short run anyway?

S&P 500 in the Short-Run

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

Prices are grinding slowly higher without too much of a downside, but on the second lowest volume in last two months. As a minimum, that calls for caution - regardless of the fact that lower daily volume on similarly lazy days during bull market runs is no reason for concern, but this one is suspiciously low. This means that the market is pausing, and looking for short-term direction.

Should it break higher from here, and leave the further detailed non-confirmations unresolved, that would be concerning for the short-term prospects of the bull market. With the early March highs at 3137, the upside potential isn't huge - it's roughly the same as any temporary drop below 3000. That's not what I would call either a high-odds setup to reach those highs, or a favorable risk-reward ratio.

Yes, the monthly price action is bullish, and the weekly one is probing a key resistance (the yesterday-discussed lower border of the rising medium-term channel on the weekly chart), but I think it's a matter of relatively short time when the sellers test the buyers' resolve here.

After a plunge that gains momentum and doesn't fizzle out within a few hours or less, we would be presented with another opportune setup. Of course, other conditions would have to met simultaneously to tip the odds in our favor some more.

How did the credit markets support yesterday's stock upswing exactly?

The Credit Markets' Point of View

Despite struggling in the roughly first third of the session, high yield corporate bonds (HYG ETF) made a staircase climb higher, closing sharply up. As the move happened on high volume, it has bullish implications for this key ETF. The cause for concern however, was that stocks lagged relatively during the day, as can be seen in the following chart.

Since the early April $2.3T bombshell was digested, stocks have been leading higher. This is what the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) with the overlaid S&P 500 prices (black line) shows.

Thanks to the spurt higher in the HYG ETF, that might be resolved with a premarket stock upswing that the S&P 500 keeps intact till the closing bell, or stocks might start to lag in the short-term. Of course, this dynamic might take more than a few sessions to kick in, but given the ratio's extended indicator readings, it's a very valid scenario.

While both the index itself, and the S&P 500 to Treasuries ratio have overcome their April highs, the short-term swallow of stock underperformance is clear. Despite stocks moving higher, their ratio to Treasuries hasn't made a new high. That's a short-term sign for caution, and of clouds on the horizons that the bond market sees.

At the same time though, the stock bull run remains intact regardless of whatever short-term hiccups it's going to run into over the coming days and weeks. That's the essence of my call for a not-so-smooth sailing over the summer months.

Key S&P 500 Sectors in Focus

As said in yesterday's intraday Stock Trading Alert, technology (XLK ETF) hasn't been exactly leading higher on the day. Apart from a sideways consolidation, yesterday didn't bring anything new to the table.

Healthcare (XLV ETF) performed more constructively, but the buyers had to defend the daily lows several times. The sector closed around the mid-point of its daily range, which is quite positive for the buyers. Such price action appears to be a consolidation of recent gains, and it's encouraging that it didn't happen on higher volume.

The price action in financials (XLF ETF) wasn't as bullish yesterday. As they are not too close to their recent highs, the lower volume has neutral-to-bearish implications for the sector in the short run. That's true despite my call for the sector to muddle through with a bullish bias in the medium-term.

Another short-term watchout are the leading ratios, as they haven't yet recovered from last week's setback. Both financials to utilities (XLF:XLU) and consumer discretionaries to staples (XLY:XLP) are pointing in the short-term direction of the amber light.

Out of the stealth bull market trio, materials (XLB ETF) performed best. Energy (XLE ETF) outperformed industrials (XLI ETF), and the overall impression of these three sectors is one of a slow grind higher in the weeks to come.

So, what other argument can be made in favor of short-term caution?

After the late-May steep rise in small caps, the Russell 2000 (IWM ETF) is taking a breather now. And earlier in April and May, that has resulted in a sharper temporary downswing than what we've seen so far.

That's why I think it's reasonable to let the non-confirmations work themselves out these days. There will always be opportunities in the markets, long or short, and it's key to be picky and act on only the strongest setups.

One more piece to the puzzle. On a short-term note from the currency markets, the USD Index appears oversold and ready for a bounce any day now. Tomorrow's ADP Non-Farm Payrolls could provide catalyst for this reversal of fortunes. And we know what kind of a stock move a risk-off environment brings...

Such were my parting pre-summary thoughts yesterday:

(...) after the March deflationary episode, the market is sensing inflation on the way... Remember, bonds peak first, then stocks, and finally commodities. And we haven't seen the peak in bonds yet, let alone in stocks.

From the Readers' Mailbag

Q: At what point does reality set in for this rally? Is it the start of a new bull market or a bull trend in a bear market?

A: I'm of the opinion that we're in a bull market. After all, the post-WWII stock bear market was the only instance when the S&P 500 made new lows after beating the 61.8% Fibonacci retracement. Given the extraordinary monetary and fiscal stimulus, it's highly unlikely to the point of unimaginable that we would make new lows, let alone retest the existing ones.

I think that this fast and sharp bear market is history, and after a sideways-to-down trading range over much of summer, this fact will become increasingly apparent both for the investment public and professionals. Look at the retail participation - it's still relatively slim, though money is increasingly coming out of the bond funds. Similarly to the run from the March 2009 lows, it has (generously speaking) taken the public till 2012 to come out of the bunker in droves and increase their stock allocation. There are few professionals that call for taking on the February highs before the year's end, and I think we have a pretty good chance to actually overcome them still this year. But we'll see and I'll keep you updated as we go.

Summary

Summing up, while yesterday's upswing ticks many a stock bull's boxes, it doesn't do the trick for several key ones. On one hand, the performance of the high yield corporate bonds is the strongest bullish factor, while the relatively limited upside potential, low daily volume coupled with extended daily indicators, and underperformance of the stocks to Treasuries ratio are the key short-term watchouts. So is the Russell 2000 lagging over the last few sessions, or the lagging leading indicators (financials to utilities, and consumer discretionaries to staples). As we're in a bull market, the balance of risks in the medium-term remains skewed to the upside, but I'm striking a bit cautious tone for the very short-term.

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