S&P 500 Trading Outlook (2-3 Days): Bullish
Yesterday’s push helped the S&P 500 (INDEXSP:.INX) make new all-time highs and a move up to 2450-2 looks likely before any post Expiration peak. But with the Federal Reserve on tap, traders need to be alert.
Industrials and Healthcare along with Consumer Discretionary, remain overweights, while the Tech sector will need to continue its bounce in the days ahead. That said, active investors should watch tech carefully for evidence of the market’s next move. As said in prior reports, a positive stance is acceptable until/unless prices get down under 2402.
TECHNICAL THOUGHTS
The market has priced in nearly 98% chance of an interest rate hike into the Federal Reserve decision today. In short, a lift in the Fed funds rate is a foregone conclusion. The Federal Open Market Committee (FOMC) rarely likes to disappoint market expectations, and today should be no different. Equities have grinded higher by 9% now (SPX) year-to-date ,but has done so in a choppy stairstepping pattern that has left many investors on the sidelines. Yields and the US Dollar index have lifted a small amount in the last week, but have been stagnant recently, awaiting the FOMC. Industrials, Healthcare, and Discretionary have all been sources of strength, and should continued to be viewed in a positive light, no matter what happens with Technology in the days ahead.
The latest BaML survey found that Portfolio managers have dropped allocations to US Equities to their lowest level in 9 years as of this past April, and this data has only improved a small amount in the last couple months. High cash allocations of 5% this past month remain supportive of further gains in Equities. This level reached 5.8% back in October 2016 which was the highest level of cash since 2001 (Urban Carmel) The dysfunction in DC with the ongoing Senate testimonies is a further distraction from any agenda being accomplished as quickly as many would like, and this adds to the layer of uncertainty that has many concerned.
Overall, Yellen’s comments might shine some light on what the FOMCs thinking is on the economy, and in turn, likely affect Treasury yields and the US Dollar. Technology however will continue to be a key area of focus given last Friday’s decline and failure to recoup this pullback which turns down to test these prior lows would be a warning for a pullback in stocks next week. For now, further strength looks likely up to 2450-2 area before any stallout.
Chart Spotlight: S&P 500 & Equal-Weighted Index
The S&P 500’s rally has now reached 9% as prices have pushed up into this FOMC meeting on a steady stream of negativity while momentum remains somewhat compressed compared to the levels hit a few months ago. This daily chart shows commonly looked at Technical indicators like MACD having made lower highs in the last few months as the market has pushed higher. This is a possible warning sign, yet price has to lead the way down. Until we see evidence of this peaking out, S&P looks likely to get up near 2452 before any peak into and/or after expiration. Breadth has improved in the last two weeks even as Technology dropped off, but important that the market maintains this broad-based strength of late and technology holds up. Failure to do that could bring about weakness post Expiration, such as what most seasonality studies suggest might be likely.
Ratios of Equal-weighted S&P, to the broader Cap-weighted SPX, or SPX/SPX, have made steady progress in the last two weeks from late May. While the equal-weighted S&P has turned down since the Election, it’s bounced hard in recent weeks, showing that despite the carnage in Technology, breadth has actually expanded in the market and the participation has grown in the last couple weeks. Sectors like Discretionary, Financials, Healthcare, have all come to the aid of Tech and served to buoy the market while Technology has softened. Breakouts of this downtrend would suggest further signs of health in the market, which for now, are premature. The bigger picture still tells a story at this point of the market being led by many of the large cap Tech stocks. But on signs of this downtrend being exceeded, one could have a bit more faith that this rally was broadening out a bit.
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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.
