While the stock market week that ended Friday had something for everyone, after it was all set and done the bulls once again won the week rather decisively. With earnings season ramping into higher gear this week and new bullish momentum coming from a variety of sectors, this may shape up to be a crucial week for stocks.
Over the course of my career as a trader, I have learned that an approach that focuses on the big picture first and then narrows in on stock sectors and industry groups offers vastly better results with less stress and work than a random single name stock picking approach.
Why? Because such an approach keeps one from fighting trends and respects the fact that stocks are a highly correlated asset class with approximately 80% of stocks moving up and down together at any given point in time.
As such, when I witness price action like last week where we saw a flurry of new sectors and industry groups turn near-term bullish (while remaining medium- and longer-term bullish), I sit up and take notice.
One of the key tools I use and that my Clubhouse members have access to is my S&P 500 sector scans. These scans are a proprietary way of measuring all sectors trends in three time frames: near-term, medium-term and long-term. The daily scan then lists which sectors are bullish and bearish in each of these time frames. The most important part of this is to note when a sector switches from bullish to bearish or vice versa in any of the time frames.
Viewing the S&P 500 Through Charts
Last week, the following sectors turned near term bullish: industrials, materials, healthcare, technology and small-cap stocks as a group. Barring any sudden outside shock, this is not the type of environment I want to get caught fighting the stock market bulls — at least not for now.
The scanner results pictured display the near-term bullish sectors on top and the near-term bearish sectors at the bottom.
Banking stocks too, despite the weak(ish) reaction to earnings last Friday, remained defiantly strong while emerging markets stocks displayed a crucial multiyear breakout.
As a result and not surprisingly, the CBOE Volatility Index, or VIX reached a fresh all-time low on a weekly closing basis last week. This just displays the degree of bullish consensus in the market at the moment.
While anytime the VIX dips below 11 in my eye is an interesting spot to start buying protection by way of put options, it is also to be understood that a low VIX in and of itself is no reason to get bearish. What one needs to look for is divergence to take place between stocks and implied volatility, i.e. only if the VIX starts making a series of higher lows while the S&P 500 as represented by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) continues to make higher highs, is a warning sign more serious.
Another sector that showed a spark last week (no pun intended) was the energy sector, which year to date has been the ugly underperformer. On the chart of the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) note that while the down-trend remains firmly intact, last week the XLE ETF printed a weekly engulfing candle, i.e. initial signs of a bullish reversal.
For me, a close back above the $66.50 area first needs to hold before I can turn even near-term bullish on the energy sector, but if and when energy stocks can start to play catch up to the broader market it would further support the broader equity indices. For now and so you know, last week the XLE, according to my aforementioned proprietary scans, turned near-term neutral after having been near-term bearish for months.
In summary and to tie all of this together, barring any sudden outside shock, the S&P 500 with last week’s breakout move remains on track toward the next upside target near 2500, which I have been highlighting for months. For the SPY this next bigger upside target comes to about the $250 level.
Check out Serge’s Trade of the Day for July 17.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
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