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Egged on by the horrendous retail sales data, S&P 500 intraday decline has gathered steam yesterday. An 8.7% drop in consumer spending can't be just waved off. Neither can the Empire State Manufacturing Index at -78.2. We have the impression that the world is waking up to the realization that this downturn is going to be sharp. Do the stocks reflect that?

Let's check yesterday's price action in the S&P 500 (charts courtesy of http://stockcharts.com ).

These were our yesterday's observations:

(...) Yes, stocks broke above the 50% Fibonacci retracement and closed darn near their intraday highs. But note the low daily volume. One can be easily forgiven when looking for a much higher one on such a key resistance breakout - expecting a higher reading is justified. Moves that happen on comparatively low volume, are best viewed with a healthy dose of suspicion.

We certainly didn't see a bullish follow-through yesterday that would invalidate the above thoughts. Quite to the contrary - stocks moved back below the 50% Fibonacci retracement and closed there. True, the bears suffered setbacks as yesterday's lower knot shows. But does this make the outlook bullish and refresh the look of the daily indicators?

Well, Stochastics just flashed its sell signal. As it happened in its overbought territory, quite a few traders (us included) wouldn't take it at face value, and would prefer to wait for the indicator to clear the overbought area first. CCI points to decreasing strength behind the stock upswing, and is on the verge of generating its own sell signal, while the RSI is struggling around its midline. Quite a bearish combination overall.

Let's quote our Tuesday's observation:

(...) It's certainly true that quite a few tradable, sizable market moves start with a fake run in the opposite direction that ultimately burns itself out and reverses course. And this is what we're likely witnessing these days in stocks as well.

(...) Regardless of the backing-and-filling that may come over the nearest days, another leg lower will come as surely as an increase in selling pressure.

And regardless of another 5245K newly unemployed Americans, it may very well turn out so. S&P 500 futures have shrugged off the number and turned higher in its wake. More than 21 million (yes, million) lost their jobs within the last 4 weeks. Paying people to sit at home and do nothing must do wonders for corporate profitability and GDP as the real economy springs back to life in one go, just like that. In short, the V-shaped recovery is a fantasy. We've discussed the disruptions in our Sunday's special Stock Trading Alert, and encourage you to read it if you hadn't done so already.

How did the credit markets do yesterday? Let's check one of the key ratios of their performance - high yield corporate bonds to short-dated Treasuries - and draw conclusions.

Mirroring the daily action in HYG ETF, the ratio opened lower and retraced part of its daily downside. Yet it closed clearly below yesterday's closing value, and the daily indicators (Stochastics is on its sell signal now and CCI on the verge of flashing its own).

Taking Thursday's bombshell Fed announcement as the starting point, this is a telling underperformance of the action in stocks. Therefore, stocks are likely to catch up with a downside move of their own, sooner or later. Most probably sooner rather than later.

As the S&P 500 trades below 2780 at the moment of writing these words, today's session will likely show just how steadfast the bulls really are. Can they hope for a result along yesterday's lines?

Summing up, whilethe stock bulls repelled part of yesterday's downswing, they didn't magically turn the outlook bullish. Tuesday's breakout above the 50% Fibonacci retracement has been invalidated. Notably, the credit markets continue to underperform the S&P 500 action. The risk-reward ratio simply isn't on the bulls' side as dreadful economic data are hitting the markets on a daily basis. Sideways trading followed by renewed selling pressure taking on the March lows, is the optimistic scenario here. The medium-term outlook remains bearish, and the short position justified as stocks won't likely keep disregarding weak incoming April and May data on retail sales, consumer confidence, employment, manufacturing or the GDP - let alone the Q1 earnings hit and lowered Q2 guidance as the lockdowns have started to really bite. Chicken are coming home to roost.

If you enjoyed the above analysis and would like to receive daily premium follow-ups, we encourage you to sign up for our Stock Trading Alerts to also benefit from the trading action we describe - the moment it happens. The full analysis includes more details about our 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 - Effective Investments through Diligence and Care

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S&P 500 has overcome Thursday's intraday highs, breaking above the 50% Fibonacci retracement of the slide from the mid-Feb highs to the mid-March lows. The setup appears too bullish to ignore. Is it time to jump in on the long side, or is the air getting too think at these altitudes?

Let's get right into yesterday's price action in S&P 500 (charts courtesy of http://stockcharts.com ).

Yes, stocks broke above the 50% Fibonacci retracement and closed darn near their intraday highs. But note the low daily volume. One can be easily forgiven when looking for a much higher one on such a key resistance breakout - expecting a higher reading is justified. Moves that happen on comparatively low volume, are best viewed with a healthy dose of suspicion. Lacking bullish follow-through, Tuesday's upswing belongs among them.

Let's bring up our yesterday's observation:

(...) It's certainly true that quite a few tradable, sizable market moves start with a fake run in the opposite direction that ultimately burns itself out and reverses course. And this is what we're likely witnessing these days in stocks as well.

(...) Regardless of the backing-and-filling that may come over the nearest days, another leg lower will come as surely as an increase in selling pressure.

We may be indeed witnessing the opening phase of another leg lower, as the S&P 500 futures are struggling to defend the 2800 mark in today's premarket trading. Is that a verification of the breakout above the 50% Fibonacci retracement, or rather an invalidation thereof?

In search for the answer, let's check yesterday's debt market performance - first, the high yield corporate bond as it's what's supposed to be quite far on the risk curve (yeah, pre-Fed intervention in the corporate market), and then its ratio to the safest debt instruments backed by the full faith and credit of the US - the short-dated Treasuries. Finally, we'll see whether stretching out the time horizon makes any difference, and draw conclusions.

High-yield corporate debt didn't add to its Thursday's gains yesterday either. The longer any continuation of the move higher takes, the more doubt the sizable Thursday's gap invites. Especially when examined from the high daily volume perspective and long upper knot of Thursday's session - that's a bearish combination. Regardless of the Fed's moves, corporate bonds will indicate shortly whether they're consolidating or hanging in the balance prior to moving lower.

What message is the ratio of these bonds against the short-term Treasuries sending? Should the bullish sentiment return and the financial stress calm then, then this ratio should be going up. Is it?

Not really. After opening higher, it had been slightly declining yesterday. In short, no progress has been made. Now, does the picture change if we extend the Treasuries' time horizon? After all, that's where the signs of upcoming inflation (given all the money thrown at the coronavirus fallout management) should manifest themselves. So, is the ratio holding up similarly well compared to shorter-dated Treasuries or not? If it is, then it points to continuing risk aversion. If it isn't and longer-dated Treasuries aren't breaking down in a big way, then their little-moved yields indicate readiness to park money in Treasuries while waiting for better times to come (i.e. it's about return of the money as opposed to return on the money).

Changing the time horizon didn't reveal a new perspective. In such an environment, it's understandable that stocks underperform instead of racing to new highs.

Before summarizing, let's quote our yesterday's parting notes:

(...) While the Fed projects the power to stave off depression, they cannot buy us a true recovery. And that's why we expect another leg lower in the coming days and weeks. Base-building is a process and while today's bullish gap coupled with the sharp advance over 2800 shortly after today's market open may appear encouraging, it works to lure the bulls into the market at a time when the risk-reward ratio isn't really on their side.

As stock futures trade around 2780 currently, today's session is shaping up to be a shot across the bow for the stock bulls. Do they stand a chance at getting their act together?

Summing up, the stock bulls took the initiative again yesterday, but this time, the credit markets underperformed on a daily basis. That makes yesterday's breakout above the 50% Fibonacci retracement look wobbly - the risk of breakout invalidation and renewed selling remains high. And indeed, today's premarket action regardless of the upbeat coronavirus message coming from the hard-hit NYC, is confirming our yesterday's words about the risk-reward ratio not being on the bulls' side exactly. As the market needs to somehow digest recent gains. sideways trading followed by renewed selling pressure taking on the March lows, is an optimistic scenario. The medium-term outlook remains bearish, and the short position justified as stocks won't likely shrug off weak incoming April and May data on retail sales, consumer confidence, employment, manufacturing or the GDP - let alone the Q1 earnings hit and lowered Q2 guidance as the lockdowns have started to really bite. Bulls beware, weekly unemployment claims are approaching!

If you enjoyed the above analysis and would like to receive daily premium follow-ups, we encourage you to sign up for our Stock Trading Alerts to also benefit from the trading action we describe - the moment it happens. The full analysis includes more details about our 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 - Effective Investments through Diligence and Care

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Sunday's special Stock Trading Alert laid out the coronavirus crisis, response and consequences ahead in great detail and a 360-degrees view. Reading it will help you get the most out of today's article as we will look at the internals and prospects of the stock market advance, and also introduce parallels relevant to today.

Let's get right into yesterday's price action in S&P 500 (charts courtesy of http://stockcharts.com).

Despite the intraday downswing and bearish opening gap, stocks didn't decline and bring the evening star formation into existence. But that doesn't mean the bulls are out of the woods now. There are several cautionary signs such as decreasing volume, the tired look of the daily indicators, and inability to overcome the 50% retracement of the slide that took stocks from their all-time mid-Feb highs down to the mid-March panic lows. Additionally, several bearish gaps such as the one right above the 50% Fibonacci retracement or higher, stand unchallenged.

Let's bring up the below chart with the relevant analysis from today's Gold & Silver Trading Alert:

(...)

Stocks didn't decline after opening with a price gap yesterday, which means that the "evening star" formation wasn't completed. However, this doesn't mean that the situation is now bullish. Conversely, what we see now resembles the previous biggest correction during this downswing - the one that we saw in early March. It started with a relatively low volume and during the daily downswing. That's also what we saw yesterday.

Of course, the above is not the key detail factor behind the upcoming decline - fear in general and closing down a large part of the world for many weeks, along with broken supply chains, is the key detail. The above simply provides a timing indication.

It's certainly true that quite a few tradable, sizable market moves start with a fake run in the opposite direction that ultimately burns itself out and reverses course. And this is what we're likely witnessing these days in stocks as well.

A careful look reveals that stocks have been trading in a short-term rising wedge recently. Yesterday's candle represents a test of the bulls' resolve. While they may and likely will push higher again, it's probable they'll meet with increasing involvement of the bears. Regardless of the backing-and-filling that may come over the nearest days, another leg lower will come as surely as an increase in selling pressure.

Having said that, let's examine two debt market charts - first, the newly supported HYG ETF, and then its ratio to short-dated Treasuries.

High-yield corporate debt couldn't add to its Thursday's gains yesterday. Whether or not it's consolidating its meteoric gains, will help determine the fate of stocks' short-term rally.

Should it be the case, then the ratio of these corporate junk bonds to the highest market cap short-term Treasuries ETF would be expected to rise as the bullish juices return to the stock market. We mean true bullish sentiment, not a reflexive rally originating in new money thrown at the issues that bring less bang for the buck than the previous stimulus did.

Yesterday, the ratio didn't really shine all too brightly. That's a leading indicator for stocks, which makes it understandable that the S&P 500 is lagging in the veracity of its $2.3T package rally.

There's one more anecdotal evidence why something doesn't feel right about the upswing. The below screenshot comes from Jim Cramer's Mad Money show.

While markets are forward-looking, anticipating and discounting mechanisms, something stinks here. Can a true market recovery take hold when the real economy is going downhill this steeply? As we've discussed at length in our Sunday's Stock Trading Alert, the case for a new leg lower and worsening coronavirus fallout, is strong. Stocks definitely appear to be getting ahead of themselves in anticipation of the V-shaped recovery, regardless of their underperformance of the debt markets.

Similarly sharp rallies have been what has punctured the way to the S&P 500 Great Depression lows. There have been quite a few false dawns since stocks succumbed to the big bear of late 1920s.

And even the on-screen number of 1938 brings up another historic parallel. One of the most memorable and also sizable stock drops came with the defeat of France in 1940. Facing Dunkerque, it became clear that prevailing over Nazi Germany wouldn't be fast. Similar recognition will strike the markets in the coming days and weeks, as the economic costs of the coronavirus fallout both so far and still to come, become reflected in stock prices. The potential for policy missteps remains high, but the Fed has been doing a good job at limiting the financial system damage, and has actually instilled a degree of confidence.

While the Fed projects the power to stave off depression, they cannot buy us a true recovery. And that's why we expect another leg lower in the coming days and weeks. Base-building is a process and while today's bullish gap coupled with the sharp advance over 2800 shortly after today's market open may appear encouraging, it works to lure the bulls into the market at a time when the risk-reward ratio isn't really on their side.

Summing up, the bulls again seized the short-term momentum, and the credit markets appear to be giving them the benefit of the doubt. While the short-term bottom is in, the nearest key resistance (the 50% Fibonacci retracement) remains unbeaten. The risk-reward ratio isn't on the bulls' side as the market needs to somehow digest recent gains. In such an environment, sideways trading followed by renewed selling pressure taking on the March lows, is an optimistic scenario. The medium-term outlook remains bearish, and the short position justified as stocks won't likely shrug off weak incoming April and May data on retail sales, consumer confidence, employment, manufacturing or the GDP.

If you enjoyed the above analysis and would like to receive daily premium follow-ups, we encourage you to sign up for our Stock Trading Alerts to also benefit from the trading action we describe - the moment it happens. The full analysis includes more details about our 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 - Effective Investments through Diligence and Care

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