4th of July Fireworks in the S&P 500 Market

The only time the bears appeared during yesterday’s trading, was at the very U.S. open. A steady move higher followed, with the final hourly upswing erased 15 minutes before the closing bell. How concerning is this?

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I don't think it's a setback worth much mentioning. Yesterday's ADP non-farm employment change hints at solid non-farm payrolls today. Credit markets are on the upturn, and stocks are undaunted by the rising U.S. Covid-19 cases. S&P 500 market breath is improving – but the Russell 2000 declined yesterday.

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Still, I think that's no reason to be worried – and not only because of the low volume decline in smallcaps. The mid-May parallel of what happened after a period of credit markets' underperformance, is hiding in plain sight…

S&P 500 in the Short-Run

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

s&p 500 market

Wednesday again brought us follow-through buying, this time with an upper knot. Is that a warning sign of an impending reversal? I would rather chalk it down to squaring the risk towards the end of the session. The joint examination of daily momentum and volume hints at a short-term pause merely – a daily affair.

The way I look at things, is that the upswing today's trading would likely bring, stands a good chance of overcoming yesterday's intraday highs on a closing basis.

That's because yesterday's non-farm employment change came in below expectations, yet stocks easily took off to new daily highs. And I expect the same dynamics to play out later today as well. There is not much new waiting in the wings to spoil today's picture.

Let's check the credit markets next.

The Credit Markets’ Point of View

s&p 500 market

The daily candle in high yield corporate bonds (HYG ETF) mirrored the S&P 500 one, and the low volume here shows that the sellers are nowhere to be really seen. This low a volume is consistent with a daily consolidation, which means that more gains are around the corner. And these gains would work to power stocks higher.

s&p 500 market

Risk-on is back. Slowly at first, as the preference for investment grade corporate bonds to the longer-term Treasuries (LQD:IEI) shows, with more still to come thanks to the high yield corporate bonds to short-term Treasuries (HYG:SHY) ratio.

S&P 500 Market Breadth and USDX in Focus

SPX

The weekly chart shows the repair in both the advance-decline line and the advance-decline volume. After their recent plunge, they have ample scope for moving higher – they are just around their neutral readings when Thursday's closing prices are taken into account. Bullish percent index hasn't dipped as low as back in May, which illustrates that the bulls are stronger this time around.

And that paints a rather bullish picture for the coming week(s), just as the USD Index situation does.

SPX

The swing structure of this relief rally appears to have run its course for the most part. To me, the chart's message is that a more risk-on environment is on the way – not a deflationary crash. Wouldn't you expect a more veracious move on new U.S. daily corona cases highs? Yeah, cases… That's it.

Summary

Summing up, yesterday's gains extended Tuesday's upswing with full support from the credit markets. The way they're turning a page over the recent prolonged weakness, points to more appreciation potential as the HYG:SHY ratio has plenty of room left to catch up with momentum to the more bullish LQD:IEI performance. S&P 500 market breadth is improving, with both advance-decline line and volume sending positive messages amid bottoming bullish percent index. Technology and healthcare are leading the charge.

The greenback isn't likely to get in the way of further stock gains, and I expect it to rather weaken as the recovery narrative gains more traction – and if you look at emerging market stocks, they've done better over the June consolidation than their U.S. counterparts. They could even start to outperform – and should they do so, that also means more gains for the U.S. stock indices as they explode higher again.

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Monica Kingsley

Stock Trading Strategist

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All essays, research and information found above represent analyses and opinions of Monica Kingsley and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Monica Kingsley and her associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Ms. Kingsley is not a Registered Securities Advisor. By reading Monica Kingsley’s reports you fully agree that she will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Monica Kingsley, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.