The S&P 500 closed at yet another all-time record high yesterday, just shy of the 2,500 level. So has it hit its ceiling?
Nope. If the past few years tell us anything, it’s that the stock market still has room to run.
Let’s start by looking at the S&P 500 itself. Based on the uptrending channel on the daily chart of the SPX in Fig. 1, you can see that the index still has room to move higher.
Fig. 1 — Daily Chart of the S&P 500 (SPX)
The S&P 500 has enjoyed a prolonged move to the upside after every consolidation range the index has formed during the past year, and we don’t see any reason why this bullish breakout would be any different.
Most of the big concerns Wall Street has been fretting about seem to have resolved themselves for the time being. Congress was able to kick the can another three months down the road on the debt ceiling, hurricane Irma caused less damage by going up the west coast of Florida than it would have had it gone up the east coast and North Korea decided not to test another nuclear warhead last weekend.
The resolution — for the time being — of these concerns has sent the CBOE Volatility Index (VIX) back down below its key level of 11 (see Fig. 2) and the yield on the 10-year Treasury (TNX) back up above 2.1% (see Fig. 3).
Fig. 2 — Daily Chart of the CBOE Volatility Index (VIX)
Fig. 3 — Daily Chart of the 10-Year Treasury Yield (TNX)
These reversals on the VIX and the TNX indicate that traders are starting to rotate out of some of the more conservative positions in their portfolios, freeing up capital to invest in U.S. equities.
So which equities are likely to attract this new influx of capital? There are actually quite a few to choose from.
As you can see in Fig. 4, just over 66% of the stocks in the S&P 500 are trading above their 200-day moving averages.
Fig. 4 — Daily Chart of the Percentage of S&P 500 Stocks Above Their 200-Day Moving Average
This is quite a ways below the nearly 74% of stocks that were trading above their 200-day moving averages in late July, and well below the nearly 80% reading from early March. This market-breadth indicator tells us that the S&P 500 still has plenty of potential dry powder to power the bullish trend higher if we see even broader market participation in this current rally.
Out of the nine sectors within the S&P 500, however, the one with the most available dry powder is the energy sector.
The Energy Sector
The energy sector — represented by the Energy Select Sector SPDR Fund (NYSEARCA:XLE) — has been suppressed for most of 2017 (see Fig. 5).
Fig. 5 — Daily Chart of the Energy Select Sector SPDR Fund (XLE)
The energy sector has been underperforming because the price of crude oil has been languishing since March (see Fig. 6).
Fig. 6 — Daily Chart of Crude Oil (CL1!)
Crude oil seems to have reached a turning point, however, and is poised to climb back up to $50 per barrel as oil supplies remain weak in the aftermath of hurricane Harvey while global demand remains relatively stable.
If oil prices can continue to rise and the stock market in general remains bullish, watch for energy companies to bounce and rally dramatically up off of their lows.
The Bottom Line
Just because the S&P 500 is at new all-time highs doesn’t mean it can’t go even higher.
You can learn more about identifying price patterns and using them to project how far you think a stock is going to move in our Advanced Technical Analysis Program.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
Most recently, John and Wade are co-options strategists of Turbo Trader Live — a live, interactive trading room service that runs two hours every trading day the market is open. Turbo Trader Live focuses on long call and put options, as well as long and short vertical spread strategies. Find out how to get in on the live trading action and start making real profits by clicking here.
