Article / 26 May 2014 at 11:24 GMT

US Stocks: S&P 500 sneaked to record high

Trader /
United States
Positive week despite thin trade

US stocks closed last week on a positive note, yet on little volume as ranks at trading desks on Friday were thinned by Monday's holiday. Despite the bears' continue efforts to pressure stocks, their reward thus far has been limited to small cap stocks and certain areas in technology, among other pockets of weakness. Tops in equity markets, particularly the ones that mark the end of a cyclical bull market, take time to develop, and that, in my opinion, is what we are currently working through. While this means that selectivity on the long side will continue to increase, it doesn't have to mean that stocks fall apart right away. I have learned this the hard way over the past fifteen years of trading, and thus both active investors and traders would be wise to continue to respect the broader trend, which for the time being still points up, not down.

Negative divergence between small and large caps

Last Thursday I once more pointed to the negative divergence that we had seen develop between small caps, i.e. the Russell 2000 (RUT.I) and their more grown-up siblings, the large caps, i.e. the S&P 500 (SPX.I). The Russell 2000 has already broken some support lines but can still stage sharp oversold bounces, as demonstrated last week. Please also keep in mind that some of the sharpest rallies in equities occur in bear markets.

Small caps and technology were the outperformers late last week as mega caps lagged. In other words, the oversold stocks and 'riskier' stocks showed relative strength.

The S&P 500 however also fared well on the charts, as it marked a new all-time daily and weekly close last week. Last week I also discussed that betting against, for example, shorting a dull US equity market is a low probability trade and indeed this came true on Thursday and Friday.

So, with the S&P 500 finally breaking to new year-to-date highs and past that pesky lateral resistance level near 1,890, what's next? Well, as mentioned above, the trend remains up and while it is still in a choppy environment, risk/reward for longs is still good. I am sticking with my multi-month upside target in the index between 1,920-1,970.

S&P 500
Source: Saxo Bank

Among the stocks that are looking better again from a trading perspective are the housing related names. Housing stocks last Friday saw nice bounces as April new home sales came in better than expected and the March numbers were revised higher as well. Home-building company Pulte Homes (PHM:xnys) for example rallied 2.50 percent on the day, which broke the stock past a multi-week lateral resistance line. The home builder stocks have traded choppily so far this year but last Friday's move may encourage the quicker traders to hop on for a follow-through buying opportunity. The stock may be ready to rally to another lower high (versus its 2013 and early 2014 highs, but that could still mean another 5 percent to 7 percent of quick upside.

Pulte Homes
Source: Saxo Bank

Another point, that is also important, is that the yield on 10-year US treasury notes continues to drop, i.e. the price of the treasury note futures (Znc1) are up on a year-to-date basis. On the charts the futures are consolidating in a higher base here, and a break in either direction may be telling for equities. This means that a further rally could cap stocks while a little move lower could offer stocks that last hurray higher in this cyclical bull. Just something to watch.

U.S. 10 year Treasury Note Futures
Source: Saxo Bank

-- Edited by Clare MacCarthy
Lubomir Lubomir
Serge, thanks for interesting thoughts on SPX
Serge Berger Serge Berger
@Lubomir, thanks appreciate the comment


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