As the S&P 500 breaks out at the 6000 resistance level and Street strategists scramble to their index targets, I also want to believe in that stocks can go higher, but I have my doubts.
The Bull Case
As the S&P 500 breaks out at the 6000 resistance level and Street strategists scramble to their index targets, I also want to believe in that stocks can go higher, but I have my doubts.
The S&P 500 and the NYSE Advance-Decline Lines are staged upside breakouts to all-time highs, which is bullish. However, the lagging nature of the mid-cap S&P 400 and S&P 600 A-D Lines does serve as a warning that not breadth indicators are participating in the rally.
Both the Russell 2000 and S&P 600 also staged upside breakouts, which are positive signs of small cap strength.
Michael Howell of Crossborder Capital, who keeps an eye on global liquidity, observed in his newsletter a positive liquidity backdrop in the short-term, but potential struggle in Q3.
Global liquidity edged higher last week to US$176.6tr, according to measures derived from the weekly balance sheets of the major Central Banks and collateral values. Still, the slowdown in global liquidity growth continues. Central Banks – particularly the Fed – need to step up to avoid a liquidity shortfall in Q3 when the debt refinancing season comes around. If the current slowing trend continues through June, risk assets and liquidity-sensitive cryptocurrencies will struggle in Q3.
From a technical perspective, the S&P 500 upside breakout leaves nagging doubts. Even as the S&P 500 breached the 6000 level, why is the equal-weighted S&P 500 struggling below resistance? Why is the 14-day RSI flashing a negative divergence signal? Why are gold miners, which is regarded as a safe haven asset, performing so well? The bottom panel shows that gold miners have performed roughly in-line with the S&P 500 during the rally off the April bottom.