We got that extension of Friday’s rally on Monday, as I called for. Vaccine hype news. Good for bulls with tight exit orders – I managed to take a 55-points profit off the table. But big tech (think Microsoft, Amazon) suffered with talk of its bubble rising, U.S. – China tensions increased, and California sweepingly rolled back its reopening.
Spooky stuff for stocks, and they tanked. The brightening outlook I discussed after Friday's session, didn't last all that long. But is the selling over now, or we better brace for some more?
Talk of inflation has been swirling for some time amid all the stimulus that's been pouring into the market and the soaring debt levels in the U.S. The Federal Reserve has said that any inflation that does occur will be temporary, but one hedge fund macro trader says there are plenty of reasons not to Read More
S&P 500 in the Short-Run
I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):
Stocks couldn't overcome their early June intraday highs just below 3230, and reversed lower on slightly increasing volume. Closing at the blue line connecting the mid-June tops, I see that the similarity to the S&P 500 taking on the late April and early May highs might be disappearning – unless the bulls pull out a rabbit out of their hats soon.
How likely is that? Vaccine news have lifted cyclicals – financials (XLF ETF) liked that. Then, Gov. Newsom rolled back California's reopening. Cold water that brought about a black daily candle in financials. It doesn't matter that they closed higher than they opened. It's the veracity of the reversal that should spook the bulls.
I would say that it's the fear of lockdowns and not surging corona cases per se, that it the culprit here. And it could make for a quick souring of market sentiment. Not that the bulls would be in a majority now, but there were some signs of greed creeping in already. Not excessive, but still.
Big banks are starting to report today, and the JP Morgan and Well Fargo Q2 results are in. Banks better have beefed up loan reserve provisions, because if California is a preview of things to come, and as reliable one as back in March when it was the first state to impose lockdowns… then things aren't going to look great for commercial real estate among many others.
How did yesterday's selloff reflect upon the credit markets?
The Credit Markets’ Point of View
High yield corporate bonds (HYG ETF) also plunged, and ended in a similarly dicey position as the S&P 500. A ray of hope for stock bulls would be volume that didn't stand out. But in my opinion, it's premature to ascribe it a bullish interpretation, or to treat it as merely a consolidation just yet.
Overlaying the high yield corporate bonds to short-term Treasuries ratio (HYG:SHY) with the S&P 500 closing prices (black line) shows that stocks bulls aren't panicking, as in really panicking. Based on recent days' perspective, yesterday's stock downswing appears as just a part of choppy trading ruling the markets lately.
While that's a possible interpretation, I wouldn't rule out some knee-jerk moves in the short run. I think the potential for more selling is definitely there, and not only because of the fundamental dynamics I described a while ago.
Enter S&P 500 market breadth.
Overcoming The Fibonacci Retracement
Arguably, the advance-decline line could go still lower before its rebound happens. The bears have probably set their sights to the 200-day moving average support that's around 3030. That would make for quite a turn in sentiment – but if you look at the daily S&P 500 chart, not that much would be happening purely technically speaking unless we break below the mentioned 200-day moving average, or the 61.8% Fibonacci retracement at around 2940.
Remember that only one bull market overcoming its 61.8% Fibonacci retracement eventually plunged below its starting point – the post WWII one. I don't think this bull run will suffer the same fate.
For now, caution is the best course of action as the very short-term outlook is rather unclear – yet with a distinctly bearish flavor.
Summing up, yesterday's late-day reversal has the potential to stick with us for longer due to the lockdown fear dynamics. Then, the tech ran into a brick wall yesterday. The Russell 2000 reversed on a strong volume, hinting at distribution. Credit markets show that panic hasn't yet set in for stock bulls, which is one of the reasons why this selling wave might very well not be over yet.
I encourage you to sign up for our daily newsletter - it's free and if you don't like it, you can unsubscribe with just 2 clicks. If you sign up today, you'll also get 7 days of free access to the premium daily Stock Trading Alerts as well as our other Alerts. Sign up for the free newsletter today!
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.
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.