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The S&P 500 Is at a Critical Juncture (SPY)

The S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — rallied nearly 15% from the February lows into the early April highs. Along the way, short sellers were decimated, and anyone trying to fight the move for more than a couple of days was quickly blown aside.

Beat the Bell: S&P 500 SPYSome, however, ask, “What has really changed fundamentally since January? Has the global economic story or corporate earnings outlooks really improved?” Both sets of data continue to slow, which makes this first-quarter earnings season a pivotal one for stocks.

While the SPY rallied sharply in February and March, it began to stall in mid-March and has since consolidated some gains. The bulls will label this as constructive, while the bears are quick to say that this is the beginning of the end.

As I made my daily rounds with hedge funds on Monday, some mused that the reason behind the abrasive rally (beyond a technical oversold bounce) may have been that the bearish thesis simply wasn’t confirmed. This would make Q1 earnings all the more important of a toggle point for the S&P 500.

SPY Charts

Before looking at the chart of the SPY itself, let’s note the relative weakness of the banks versus the S&P 500.

On the below ratio chart, we can see that banking stocks as a group this year have broken below support and out of a triangle formation. In many ways, the financial sector holds a clue to the direction of the broader stock market for coming months. If earnings and the outlook for financials look upbeat and this is somehow combined with hawkish rhetoric by the Federal Reserve, then the financial stocks could rise and keep the broader market afloat.

If this does not take place, then the odds strongly favor that this relative weakness by financials stocks will spill over into the broader stock market.

Click to Enlarge

On the next chart, I plotted the SPY ETF versus the KBW Nasdaq Bank Index, which is represented by the blue line. We can see that the horizontal support area for the S&P 500 effectively acts as horizontal resistance for the BKX.

Very simply, either this line of resistance breaks for the banks as they begin to rally, or the SPY breaks below support.

Click to Enlarge

On the daily chart, we see that the SPY has been holding above its  yellow 21-day simple moving average ever since breaking above it in February. However, the choppy sideways move in the SPY over the past few days increasingly threatens a break below this moving average, which would then target an initial move lower into the $198-$200 area. So, even though the SPY etf is overbought by most metrics, the financial sector could hold the clue as to the next intermediate-term direction.

S&P 500 SPY
Click to Enlarge

Watch the banks and respect any break below the 21 day moving average of the SPY etf.

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