S&P 500 Trading Outlook: Bullish With A Few Caveats

S&P 500 Trading Outlook (2-3 Days):  Bullish bias for the next few days given yesterday’s move above initial resistance in the S&P 500 Index (INDEXSP:.INX) and Dow Jones Industrial Average. Also, the NASDAQ Composite moved back to new all-time highs.

There’s more work left to be done, but encouraging signs for the Bulls

While additional upside progress is necessary for the S&P 500 to have real conviction about a move back to new highs, the NASDAQ managed to move right back to new all-time highs following the FOMC’s “Kick the Can approach”. And it looks to gain further ground in the days ahead. Market breadth expanded to a near 6/1 pace for Advancing vs Declining stocks, with volume flowing into “Up” stocks at an even heavier 90% of total. We are also seeing sharp rebounds in most commodity sensitive names given the pullback in the US Dollar.

Bonds experienced a roller-coaster ride that saw yields fall, then rise, then drop back to lows for the close. This is likely due to expectations of weaker growth and a general disbelief about a hike this year.  Defensive sectors like Utilities, Real Estate and Telecomm all rose greater than 1%, while an impressive push higher by Tech, Energy, Industrials and Materials also carried all these sectors higher by 1% or greater.

A couple of important points worth noting:

Bullish sentiment has been cut in half in the last couple weeks.  Investors Intelligence polls showed a plurality of around 40% between Bulls and Bears which has now been reduced to 21 in this week’s report (released Tuesday).  Given that equities really showed little selloff, but clear signs of anxiety were present, this bodes well for an eventual move back to new highs.  Sentiment still seems quite skittish regarding Fed policy and economic growth. And a tighter than expected Election is adding another layer of tension. All of these should be net positives for Equities given that the S&P 500 has seen little to no selloff.

Seasonality remains quite negative for the market during this time in late September.  Even during Election years, the last couple weeks of September tend to have a decidedly negative bias. As reported a few days ago, the last 20 of 25 Post Q3 Expiration weeks have been down. But thus far, this week has been fairly resilient.

Dollar weakness worth watching. For now, USD index still range-bound-  The dropoff in the Dollar spurred on sharp gains in both commodities and stocks which correlate well with commodities, as Energy, Industrials and Materials led, while Precious metals stocks soared nearly 6%.  Emerging markets stand to benefit from a declining US Dollar, while Gold should also begin to work its way higher.  For now, not too much can be gleaned just by looking at daily charts of the US Dollar index, outside of seeing a fairly bearish one-day engulfing pattern, which should lead lower in the days ahead. Given the US Dollar’s range-bound tendencies overall since late last year, we’re moving closer to where the Dollar could witness a huge breakout.  For now, one can’t say this move should definitely be to the downside unless August lows near 94 are taken out.

S&P 500 Futures

Hourly S&P 500 futures managed to do the unlikely and breakout above last week’s highs following Wednesday’s FOMC meeting.   The S&P 500 climbed above resistance at 2147 and is approaching higher resistance levels. The move in the NASDAQ and DJIA look far more bullish, and should allow for at least a few days of gains.  While the move higher might not come in a straight line, the technical picture seems to have improved with yesterday’s success in exceeding recent highs.

Thanks for reading.

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