Will the S&P 500 continue to move sideways after a breakout?
The S&P 500 has been moving in a relatively narrow sideways range between 4160 and 4040 points since March 31, which is about 3% of the index value. Both the upper and lower bounds of this range have been tested over the past trading week: on Monday, May 1, the corresponding ETF on the S&P 500 (SPY) rose just above $416 but closed below it at the end of the day. The short sellers took advantage of this failed break-out attempt and pushed the ETF to the lower limit around $404 by Thursday, May 4. This area was used for purchases on Thursday as early as one hour after the start of trading, which was then followed by follow-up purchases overnight and then also during the trading session.
The ping-pong movement in the past trading week had been accompanied by a large number of monetary policy news (FED interest rate decision) as well as economic data; but also numerous quarterly results had to be mastered by the stock market. The trading range of the ping-pong movement in the S&P 500 has widened compared to the trading range of the whole of April in the first week of May alone.
The widened trading range can of course be attributed to the many news from the first week of May. From a technical point of view, such a broadening of an already tight trading range usually indicates a breakout to the downside: A breakout below 404 US dollars in the SPY ETF therefore seems more likely to me for the next two weeks of May than a breakout above 416 US dollars from a purely technical point of view.
It seems unlikely to me that a slide below $404 in the SPY ETF would cause a sharp downward movement because of the high short positioning of institutional investors. Presumably, the short sellers will use prices below 400 US dollars in the SPY to reduce their short quota instead of expanding it further.
However, we also see a tentative signal for today, which speaks for an imminent renaissance of risk-on activity: The IPO ETF (IPO), which contains stocks that have not been listed on Wall Street for too long, is surprisingly upgraded to the “buy or top-up” stamp for this Monday. On Friday, the IPO ETF exceeded the interim high of May 1, which was also achieved by the ETF on the Nasdaq 100 (QQQ). If the outperformance of IPO stocks shown in the past trading week continues over the next few trading weeks, then this could pull up the ETF on the Russell 2000 (IWM), which contains mid-caps.
Currently, however, the IWM ETF continues to receive the deep red daily stamp “wait and see or speculate on sell-off”; In terms of charts, we do not yet see any formation of higher lows or higher highs in the IWM ETF – which we can now locate for the IPO ETF.
What do we see under the radar of the major stock indices?
We currently only see a “buy or increase” daily stamp, which is accompanied by higher lows or higher highs in the chart, in a few sector ETFs. These include medical technology (IHI), pharmaceuticals (IHE) and biotechnology (XBI) from the healthcare sector, while house construction (XHB), infrastructure (PAVE), water (PHO) and technology (XLK) should be mentioned from sectors sensitive to economic cycles. In addition, there is the ETF for wind energy (FAN), which is, however, globally positioned, with the US region underweighted against Europe and Asia.
Energy stocks have recently been bought in Europe and Asia, not in the US
Energy stocks have outperformed since the October lows outside the US.
U.S. energy stocks are showing relative weakness to their counterparts in Europe and Asia, both in fossil and renewable energy and electric utilities.
A German stock like Siemens Energie (WKN: ENER6Y) has more than doubled since the October low.
Germany’s E.ON (WKN: ENAG99) has also risen by around 60% since the October low.
The largest oil producer in China, Petrochina (WKN: A0M4YQ), has also risen by about 60% since the October lows.
Corresponding stocks from the USA such as NextEra Energy (NEE), Sempra Energy (SRE) or Exxon Mobile (XOM) cannot keep up and have only gained between 7% and 27% since the October lows.