Resistance Test Ahead

The S&P 500 is poised to test it’s June 8th resistance area this week. This could be a significant ‘tell’ for the markets if we’re able to finish the week above the 3233.13 intra-day high hit six weeks ago.

While major indexes have climbed for the past several weeks, the underlying technical data has been less confirming of this pattern. Many stocks, still above their 200-day-moving-averages have slipped below their respective 50-day-moving-averages. This subtle show of disorganization ‘under the hood’ of the major indexes is a small cause for concern.

On the other hand, looking at the BigFoot database, we now see 85.65% long signals on 11,375 tracked positions. The BigFoot Algos used to populate this database use volatility as a component of their decision process. So a high long percentage indicates that over 85% of the stocks being tracked are either buy or hold recommendations by the Aglos.

If there was pause to be had, it’s because the market seems to be reaching a point of agreement: volatility is low, the trend is positive, and the major indexes (not including the Nasdaq, which is already at fresh highs) are looking to test their prior high-water marks.

Points of agreement in the market can be a sign for concern if sentiment shifts suddenly. If you get more sellers than buyers in a market, prices can shift more violently. Of course, what causes something like this to occur is as much superstition as it is data. Are we simply “due” for a correction? No… but that doesn’t preclude it either.

If the technical pattern for the SPX means anything, it looks like more up-side on the horizon. The index put in a significant amount of support at the 3062 price area. A close above the 3233 area mentioned earlier would indicate a potential re-test of the all-time highs for the index.

The only issue here is that the SPX is less and less a reflection of the market at large. We’re beginning to see the mega-caps occupy such a significant portion of the index they are able to hide the activity of many smaller cap players in the index.

The phenomenon is being exaggerated as the mega-caps continue to grow. So we may be in a position of having to start tracking additional indexes to better discern the behavioral patterns of this market.

If one thing is certain in investing… markets change. Principles may not. But tactics must adapt as exploits are worked out of the system.

But for now, we work with what we’ve got… For this week, look for a sideways pattern with a bias to the positive. It’s unlikely to be a straight line up as earnings season is delivering a bag of both winners and losers. The SPX looks poised to challenge 3275/3300 this week.

We’re nearing the end of round 1 of government stimulus in the midst of the Covid crisis. The first round was fairly easy – everything was a mess and officials just wanted to do something… anything… so money was thrown around like confetti. This time around, there is more politics at play. And since political rallies are out, you can bet stimulus will be leveraged as a form of voter influence. So what stimulus looks like, how soon it gets delivered, or even if it gets delivered, are questions the market must sort through.

The Fed has shown it is committed to keeping the bond markets placated for now. But even that has supply/demand limitations. So don’t think the Covid stuff is in the rear view mirror just because major indexes have mostly recovered (look at the Russel value indexes if you want to see where the damage is).


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