The S&P 500 to go Parabolic?
Our followers and students have understood why stock markets have recovered all their losses, and now the S&P seems on the verge of making all time record highs. There is a divergence in the real economy and the stock market. Money is flowing into the stock market in a global chase for yield. With central banks cutting rates, and negative interest rates are being priced in, the stock market will be the only place to go for real yield. The promise of more cheap money from central banks and government stimulus policy means interest rates are going to be low for a very long time. In fact, with the amount of new debt issued, I do not even think it is possible for interest rates to go higher. This is driving stock markets higher, and central banks will do everything they can to prop markets.
The S&P is the chart to watch right now. We have been long the Russell 2000 and added the Dow to our positions in the previous week. If the S&P 500 breaks out, I believe the Dow will join in eventually. One other thing to factor is a covid vaccine. According to the major US banks, the market has NOT priced in a covid vaccine yet. With an S&P break out, and then an eventual covid vaccine, with all the macro themes…the stock markets can go parabolic.
But wait, there is one more big factor which I will discuss later below. First, let us analyze the S&P chart.
As you can see, we are at a major resistance zone, and all other markets will move according to what the S&P does. I want you to pay attention to the blue box I highlighted. This was price action when we were testing the “Wuhan” zone which I discussed in my last blog post. I mentioned how important this zone was to the markets, and we ranged for 7 days before breaking out. It is highly probable that we see price action range at this level for a few days just like we did at the Wuhan zone.
Can we reverse? Sure we can. My followers know the only thing which can bring markets down would be a black swan event. It would likely come from the US-China trade war front. There is a chance that election news can impact markets too, but this might play out the closer we get to November. I believe the big catalyst was the US stimulus. We were promised this stimulus for a few weeks, but now we have heard that congress has gone on vacation for the remaining month of August. Markets did not react negatively as much as I thought it would. We will have to see how this plays out in the following weeks.
BUT there is one chart that we all know we need to watch for money flows. The 10 year yield.
The 10 year yield was 0.50 last week, and then finished over 0.70 this week. A huge move in the bond market. What does this mean? That money is LEAVING bonds and we should expect it to flow into stocks. Fund managers use the asset allocation model of re-balancing stock and bond positions. They are paid to make yield, so they cannot sit idly in cash for a very long time. That cash has to be used. So I do think that this money is waiting to see if the S&P 500 breaks out into record all time highs. They will then chase this move. To summarize, there is a big amount of money leaving bonds and waiting to enter the stock market.
Also for my students: do you see our market structure pattern signsl?
Finally I want to talk about one other case for parabolic stock markets. We need to talk about the US Dollar, as it plays a role.
Yes, the weaker the dollar, the more dollars it takes to buy things which is inflation and this means stocks rise too. But I do believe a move in the Dollar can be bullish given what it indicates.
For my students, this Dollar pattern has been on watch for a very long time. The 92.50 zone is a huge flip zone. We thought we would make a double bottom pattern and we still can, but the breakout is the trigger.
Sure the Dollar can go up due to a risk off move as money runs into safety…but that would bring markets down. Now we must talk about foreign money.
There is a chance that European and Asian money will run into the US. European markets have not really moved, and we know Europe has tons of problems. Most western nations do, but the US remains the best looking. With stock markets making incredible moves, European and Asian money managers will want to enter US markets as others have lagged. This would mean a BID in the US Dollar as foreign money buys dollars to buy US stocks. Watch for this to happen with a coincide break in the S&P. This would indicate foreign money coming into US stocks and aiding in the push higher for stock markets.
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