Stock Market Trading Update: Bulls Press The Market Higher

S&P 500 – (2-3 Days)- BULLISH 

I expect a near-term upward push above 2462 on the S&P 500 (INDEXSP:.INX).  This should turn the short-term trend back to positive for a rally into early September.  A move above 2462 would allow for a larger bounce before any selloff gets underway.

Technical Thoughts

No change in S&P 500 chart pattern as of yesterday’s close. Most US stock market indices remain in a tough spot after the early week rally stalled and has not yet made up enough ground to call for a revisiting of new highs. My overall thoughts on the S&P 500 (NYSEARCA:SPY) will not change in the days ahead, but a bullish stance looks proper for a move up to 2462, with movement over that mark helping to gain conviction of a larger early September bounce. Should this occur, we would likely see weakness into the end of October.

Movement down UNDER 2430 and particularly UNDER 2415 would be quite negative, and while not immediately expected, puts the bearish case on the front burner very quickly.

Five key concepts that are important to discuss:

1).  Emerging markets (NYSEARCA:EEM) continue to make headway. EEM moved back to new multi-month highs yesterday and markets like Brazil, Russia, Korea, Taiwan are all making good headway. These in nearly all cases, are trending up at a bit faster pace than US equities and their patterns are a bit more constructive near-term and cleaner. While many rightly argue that the US Dollar is overdone and should be close to turning back up. We’ve seen precious little evidence of that just yet and heading into Jackson Hole talks by Yellen, and Draghi, it’s still right to expect a final flush in the US Dollar index (EURUSD back to new highs) BEFORE any reversal gets underway.  This should fuel the Emerging market rally a bit longer.

2).  Small-caps and Equal-weighted SPX have both begun to stabilize and turn higher vs the cap-weighted SPX.  This is an interesting development at this stage of the rally and is more positive than negative in the very short run. While the longer-term downtrend in both has been ongoing most of the year, a counter-trend bounce looks likely, which could help breadth improve into early September, emboldening investors before a fall equity drop.

3).  Energy continues to show signs of waning to turn the corner and outperform, despite WTI Crude falling to new four-day closing lows yesterday, and charts of XLE, OIH look to be on the verge of trying to turn higher, which would be welcome relief to most Energy investors after losing 17% in this sector YTD thus far, through 8/24/17.

4).  Transports continue to underperform, with Airlines having given back a Fibonacci 38.2% retracement of the prior 18-month rally from January 2016 in just six weeks time.  This has caused severe lagging in the leading Transports sector which peaked out in mid-July, and could be problematic for the hopes of a continued September/October advance without any “consolidation”.

5).  AAII investor sentiment now shows an inverted Bulls vs Bears spread to the tune of 10 points, with AAII Bears at 38% vs Bulls at 28%.   While this is just one piece of the sentiment puzzle, it shows that people have indeed pulled in the reigns a bit in recent weeks, and makes it doubtful we can see an immediate plunge (in my view)   Particularly given the strength of Tech, Financials, and the newfound leadership in Healthcare once again.

As stated yesterday, I continue to believe Financials and Technology hold the key.   While indices remain in a difficult choppy pattern near-term, it’s important to watch for signs of XLF in getting back OVER $25, or MSH index clearing 1540 to have confidence of this rally continuing.  Conversely, the severe deterioration in these two sectors would also be notable and bearish.  At present, on a very short -term basis, it looks right to still favor a near-term bullish case as part of a bearish view between September and late October.

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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.