S&P 500 approaching an important resistance… Is this rally about to end or continue?

S&P 500 rallied and finished strong this week as anticipated. I wrote about the necessary help from broader market participation in last week’s post, and we got it. But what next? Let me present you arguments for and against this rally and what to look for going forward.

SPX is approaching a very important price resistance between around 2450 and 2500. Let me first show you a monthly chart of SPX. spx_1If we project the distance between 2007 high and 2009 low higher we get 200% extension at 2500 level. Also, if we do the same between 2014 high and 2016 low we get 200% extension just above 2450 level.

Now, if I show you a daily chart as well, we can see that the break of the current ascending triangle has a target at 2480 level. Again the same price level as on the monthly chart.spx_2I am not calling THE top, but I would be happy with taking (partial) profits in this market as we might get a correction/consolidation in this bull market soon..

Now, I am fascinated by how some people want to present tops as an overnight event rather than a process, but let’s leave this to them.. we have to be thankful to them as they are helping to fuel this rally. As Joe Fahmy discusses, current sentiment is a big part of what’s driving this market. We can see that the market is very nervous. If the market drops by 0.5% everybody already starts calling the top. If market rallies by 0.5% then everybody starts calling a bubble. With calling the top/bubble they most likely start selling call options, buying put options and/or shorting the market. This just helps to fuel this rally if you ask me.

On the other hand, only 54% of Americans are owning stocks right now. This is near 20 year low.dam13eqxgaaqwp5

Yes, I know.. if baby boomers start selling their pension stocks they can push the market down. But what if they already started selling 10 years ago? And what if Americans start accumulating stocks again while the number of stocks in the US halved in the last 2 decades?

As Joe also writes, markets might be providing a generational opportunity right now. What if we are at the beginning of a major bull cycle, similar to the one in 80s and 90s?

chart3-1

I am not a blind bull, in fact, I am concerned about the economy. If you are a European and you don’t live in the City of London or a bigger German city, you probably still feel that the economy didn’t recover from the ’08 crisis. In the last year Europe finally started recovering a bit.. and in the context of this post one should ask yourself, is this just a short-lived recovery before the storm or the beginning of something great?

Let me point out some things I am watching very closely which could give a heads up in case the storm starts appearing.

I wrote about the US 10y2y yield curve on the 8th of April [1] and let me show it again. For me this is one of the most important indicators I am watching right now. If the yield curve flattens even more and goes to 0, this would be a major warning sign. Let me show you the yield curve in comparison to the yield curve between 1985 and 2003. yieldBulls wouldn’t like to see the yield curve breaking lower towards 0, but the bears are already expecting this to happen. Let’s see..

As Julian Brigden pointed this next relation between the SPX and the FED’s balance sheet recently I’d like to show it to you as well.. balance_sheetWe can clearly see that the SPX was rallying when the FED was accumulating assets. This month the FED is expecting to raise rates on their FOMC meeting. But raising rates is not the main concern at this point if you ask me. Bigger concern is that some FED members are talking about reducing the balance sheet – selling assets in other words. We can argue if they can afford it or not, but I guess you know what this means if they try to reduce it. They might even try to do it, but if the market starts crashing.. they will have no other option than to start buying again to provide liquidity!

On the other hand, let me remind you that the number of tradable stocks available is constantly decreasing and that only 54% of Americans are owning stocks where the ownership rate was steadily faling in the past 10 years. If Americans start accumulating increasingly limited number of stocks again, could they bring the necessary liquidity in the market to fuel the rally? In this case I guess the main question to be answered is, can they replace any lack of accumulation from FED or, if the FED starts reducing the balance sheet, can the transition happens soft enough?

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