US500 breaks 3400 as blue wave becomes consensus
The US share market staged a strong start to the week, with the S&P 500 (US500) once again taking out the February highs and closing above the 3400 handle with a 1.8% rise on the day. If we look back to mid-September, price failed to move higher after a similar move, so what’s the case for the US500 this time?
From a technical perspective, take note of how the 5-day EMA (green line) has supported the daily candles since late September. Compared to the last break of 3400, the 5-EMA this time is higher than the 20-EMA (blue), which indicates stronger momentum from the bulls this time. Where I become concerned is price moving below the 5-EMA on daily closing basis, which may hint at trend reversal. I'm bullish until then.
Let’s also consider yesterday’s newsflow that accompanied the bullish session. Speaker Nancy Pelosi has hinted chances are higher of a stimulus package passing through Congress, and President Trump was discharged from Walter Reed hospital to return to the White House.
But perhaps more interesting is that as polling shows Biden holding his strong lead over Trump, markets are beginning to accept this as consensus. And you’re right - usually the prospect of higher taxes and increased regulation on finance, tech, and energy companies would be bad news for the stock market. This year might be different.
The bullish case for US stocks - and the economy in general - is to spend the way out of this crisis. Although the Trump administration has overseen record deficit spending, the democrats have shown in ongoing fiscal talks that they’re prepared to do even more. Biden’s plans for presidency include stimulus spending of up to $4 trillion over the next ten years.
Of course, a clear win either way reduces the chances of a contested result - a dreaded outcome that would throw markets into uncertainty for several weeks.
The VIX remains high at 27.94% so whichever way the US500 moves, expect it to be a bumpy ride and consider position sizing accordingly, especially as the US election draws closer. The record highs at 3588 are a huge level to beat.
US500 breaks higher with 3400 in sight
A bullish session on Wall Street and the S&P 500 (US500) may have found its mojo again. The US500 has broken out of the September descending channel on the daily chart, after impressive breadth on the day with more than 90% of its stocks closing higher.
Price is now eyeing a move back toward the pre-COVID highs just below the 3400 handle. The bulls failed to hold this level mid-September - so is a breakout of the descending channel the conviction markets need to trade higher again? Turnover for the S&P 500 was a touch below the 30-day average in yesterday’s session, so I’ll be watching how price develops today and throughout the week.
But it wasn’t only a break out of the descending channel, price also took out the 20-day EMA (blue), 50-EMA (purple), and 5-EMA (green) with a higher close. With the 20 and 50 getting closer to each other, the bulls will not want to see them cross over, as this would be a bearish signal of possible trend reversal.
However plenty of uncertainty persists. As the US election approaches, investors are bracing for what the possible administrations may mean for financial markets, as well as the likelihood of a contested result. Daily coronavirus cases in the US remain above 30,000 per day. The US stock market could well be in for some choppy movement over the coming weeks.
Looking more broadly across the stock market, small-cap stock index the Russell 2000 (US2000) has reached the top of its own descending channel after defending the 200MA last week, although price has not yet broken out of the bearish channel. This is one to keep an eye on - a bullish break from the small-cap index may give the US500 bulls further encouragement.
Is today the day for an S&P 500 record high?
The S&P 500 (US500) is a whisker away from setting new record highs. The equity benchmark has barely reacted to US Congress failing to reach a fiscal deal before recess and the index has been testing resistance for a week now. Perhaps it’s on confidence that the Fed is there as a backstop, or perhaps increasing pressure on Chinese tech companies is US tech yet another boost. Whatever the case, the US500 looks positioned for new records and a path to 3500.
The equity rebound since March has been highly concentrated in tech companies. They’re aggressive growth stocks like Amazon (AMZN.O), Microsoft (MSFT.O), and Apple (AAPL.O), and their outperformance can be seen on the tech-index NAS100, which has been setting record highs since early June.
Consumer discretionary stocks have also posted stellar performance, as the US consumer seems to lead the economic recovery. This could all be stopped in its tracks after US Congress failed to agree on a new fiscal relief package before shutting down for recess, with democrats and republicans about $2tn apart in proposals. As the fiscal relief dries up, spending will also fall - and if consumption data starts to slow as a result, well that could be bad news for stocks.
Looking at technicals, take note of the triangle formation on the weekly chart since early 2018. The top of the triangle may just provide a ceiling to any potential upside, yet does offer a little room for a move above even 3500. In the longer-term, a breakout above this triangle could be a game changer.
Weekly chart: US500. Chart source data: Metaquotes MT5.
In the nearer-term, I’m watching for a US500 record high on a daily closing basis. Is today the day it finally happens? And when it happens, will it bring more equity bulls into the market?