U.S. Equities Update: Rally Likely To Pause By Thursday

Mark Newton

S&P 500 Trading Outlook (1-2 Days): Mildly bullish

Gains on the S&P 500 (NYSEARCA:SPY) will likely find strong resistance near the Mid-June, Mid-March highs around 2800-2805 before a minor backing off come mid-month.

Tuesday-Thursday of this week is a good spot to be selling into (for traders), with targets near 2805-2810 for S&P 500. The thinking here is that gains should not continue uninterrupted without a stalling out and another minor reversal.

There have been no meaningful signs of trend reversal to this bounce so we’re sticking mildly bullish for the next day or two.

The S&P 500 has now managed to gain ground on 5 of the last 7 trading days from the bottom made back on 6/27 in late June. Near-term momentum and breadth have improved, and NYSE All-stocks Advance/Decline is now back at new all-time highs.

These are encouraging signs, despite the lackluster movement in recent months, and structurally, we still haven’t really seen much if any real weakness. The drawdowns thus far into end of month have all caused fear to spike meaningfully, given understandably bearish reasons. Trade war possibilities with the likelihood of expanding tariffs, and a Treasury market that doesn’t seem to believe in the FOMC’s thoughts of growth expanding.

Similar to the past five months, we’ve seen an early month rally which has now taken prices up to near levels hit back in June and March for S&P, while Europe has engaged in a counter-trend rally within its downtrend. Emerging markets have shown some signs of bouncing of late, along with precious metals, while the Dollar showed a few signs of rolling over in recent days, outside of Monday’s gains on BREXIT uncertainty with the resignation of two key members of May’s cabinet. While Tech and Financials have wobbled a bit, their pullbacks thus far have proven minute, and other sectors such as Healthcare, Discretionary, and Industrials have all come along to help cushion the broader indices.

With today’s gains, the rally is now growing stretched. We’re close to seeing intra-day Demark-based exhaustion on a few different timeframes. Additionally, we see that Bond yields have only made minor progress higher in the last couple days, and over the last couple months have continued to drop, from 3.11 in mid-May, while dropping to 3% into mid-June and now lies near 2.86. So Bonds have remained firm, while the yield curve has flattened. Furthermore, there lies a key time into this coming late week that likely should provide a turning point yet again, similar to mid-June, and it’s thought to be a minor high.

A couple key points to make here:

First, breadth has grown more supportive of late, not less in recent days, with a number of 2/1 or above days of Advance/Decliners.

Second, the sectors we eyed for being at possible support, like industrials and materials looked to have bottomed and just in the last couple days we’ve seen a flight out of the Defensives, with sharp pullbacks in Utilities, REITS and Telecom.

So it’s thought that while stocks might peak out again in the days ahead and make minor corrections, the structure of this Equity rally has not really given way, and has gotten more supportive of the idea of buying dips yet again for a rally from late July into August/September.

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Author has positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.