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The Sky Has Just Cleared for Stocks in the Short Run

Yesterday, I highlighted the S&P 500 grind’s seesaw nature just in time for the intraday bear raid to hit. How much of damage has it done, should I pay attention to hanging man candlestick? My article discussed not so smooth sailing ahead in February. Muddling through, yes – the start of a real correction, no.
Why should it be on the immediate horizon anyway? Quoting my yesterday‘s analysis:
(…) The Fed‘s foot is back on the pedal, but inflation hasn‘t reared its ugly head yet – the path of least resistance for stocks remains higher. Unless the corona vaccination programs disappoint the markets, hurting cyclicals and the breadth of stock market advance, that is. Such a turn would take quite some activist economic policy steps to counter, as you can imagine.
In today‘s article, I‘ll shine light upon yesterday‘s tremors, and the S&P 500 sectoral outlook, demonstrating that we‘re merely experiencing another rotation within the ongoing stock bull market. And the stock pickers will also benefit.
Now that you know what‘s up let‘s dive into the technicals (charts courtesy of www.stockcharts.com).

S&P 500 Outlook

s&p 500

Long lower knot with the bears temporarily flexing their muscle before the bulls stepped in. The improving volume shows a certain degree of conviction, a welcome sign for today‘s session. While the daily indicators are extended, they don‘t support any great rollover call to the downside.
My yesterday‘s words are valid also today, with us having seen the opening push lower already:

(…) The daily indicators seem to favour largely sideways to mildly higher trading action in the nearest days. That‘s one point of view, with the other being that prices haven‘t declined enough to lure in the buyers yet. Given the volume examination, I lean towards sideways trading coupled with an unsuccessful push lower as the most probable scenario over the coming 1-2 weeks. Then, higher prices.

Credit Markets

picture 2

High yield corporate bonds (HYG ETF) have also held ground quite well yesterday. While slowing down in pace, the ascent isn‘t broken with a lower low. Investment-grade corporate bonds (LQD ETF) had a much better day yesterday.

s&p 500

Both leading credit market ratios – high yield corporate bonds to short-term Treasuries (HYG: SHY) and investment-grade corporate bonds to longer-dated Treasuries (LQD: IEI) – support the stock bull market to continue. With the latter one refusing to budge yesterday, I have likely seen local lows for January already.

s&p 500

The stocks to 10-year Treasuries ($SPX:$UST) ratio shows the preference for risk-on assets as intact. The post-election performance is contained within a quite tight, upward sloping channel.

s&p 500

The spread between 3-month and 10-year Treasuries tells me about increasing willingness to park funds on the sidelines. That‘s the very short-term, daily interpretation. The big picture view reveals that money flows away from the long end of the curve (understandably so given the surefire prospects for the return of inflation, in my view), and stocks are benefiting.

The Sky Has Just Cleared for Stocks in the Short Run

Volatility spiked yesterday before retreating soundly. Another push higher is likely to come soon, but I am not looking for it to overcome yesterday‘s highs really. I view $VIX as rangebound for the coming weeks with a spike here and there, within the pattern of lower highs.

What would make me change my mind? A new narrative replacing the current one of a spending-heavy administration making its moves hand in hand with the Fed. Hand on your heart, how likely is that this soon in the game?

S&P 500 Sectoral Performance

The Sky Has Just Cleared for Stocks in the Short Run

Technology (XLK ETF) smartly recovered from the intraday plunge but might not be yet out of the woods as the coming sessions would show. Considering its appreciation since the early September climactic top that I‘ve called, the sector has visibly slowed down after leading the S&P 500 from the vicious bear market bottom on March 23.

The Sky Has Just Cleared for Stocks in the Short Run

Semiconductors (XSD ETF) belong among the leaders too. While they have performed much stronger than technology since Sep 03, they haven‘t recovered the daily setback to the same degree. Still, they keep trading within their steeper upward sloping channel comfortably thus far. Even after a one-way elevator ride, a period of consolidation sooner or later comes, and I might be on the doorstep of one here.The Sky Has Just Cleared for Stocks in the Short Run

Healthcare (XLV ETF) is the second S&P 500 sectoral heavyweight, and it keeps doing fine. Pushing higher, being among the better performing sectors recently, which is supported by its internals. Enter biotech.

The Sky Has Just Cleared for Stocks in the Short Run

What semiconductors are to tech, biotech (XBI ETF) is to healthcare. And this leading segment continues to outperform healthcare as a whole, which bodes well for the S&P 500 as such.

The Sky Has Just Cleared for Stocks in the Short Run

Financials (XLF ETF) are the third heavyweight, and appear to be done quickly with their corrective move. That‘s the message of rising volume and long lower knot to me.

picture 12

The value to growth sectoral ratio (VTV: QQQ) shows I‘ve reached levels consistent with another rotational wave into growth. Just look at the sectors trading with low price/book and price/earnings ratios, and you‘ll see the defensives (utilities, consumer staples), financials and real estate rebounding. Materials, industrials and energy are also ready to rebound, displaying the same price patterns as financials.

Summary

A sharp intraday correction has come and gone, and the tech performance remains the key precondition of its return. And given the short-term relative weakness in the sector, the nearest days may bring another push lower that won‘t however jeopardize the bull market in the least.

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All essays, research, and information represent analyses and opinions of Monica Kingsley based on availability and latest data. Despite careful research and best efforts, it may prove wrong and be subject to change with or without notice. Monica Kingsley does not guarantee the accuracy or thoroughness of the data or information reported. Her content serves educational purposes and should not be relied upon as advice or construed as providing recommendations of any kind. Futures, stocks and options are financial instruments not suitable for every investor.

Please be advised that you invest at your own risk. Monica Kingsley is not a Registered Securities Advisor. By reading her writings, you agree that she will not be held responsible or liable for any decisions you make. Investing, trading and speculating in financial markets may involve high risk of loss. Monica Kingsley may have a short or long position in any securities, including those mentioned in her writings. She may make additional purchases and/or sales of those securities without notice.

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