SPY Stock Path to New Highs Is Still a Realistic Outcome

  • The SPDR S&P 500 ETF Trust’s (SPY) bad week is not necessarily an omen for bear market.
  • Yesterday’s late day nose dive had special circumstances behind it.
  • The market largest components are healthier than ever.
The Standard & Poor's 500 is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. SPY stock follows the exchange.
Source: Pavel Ignatov / Shutterstock.com

Wall Street investors are showing a tremendous amount of indecision. The dilemma is between current strong macroeconomic conditions and potentially explosive geopolitical risks. There are a few other wrinkles, the largest one being U.S. Fedeal Reserve tightening cycle. After years of dovish monetary policy, they are now embarking on the opposite. Yesterday the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) stock fell 1.5%, on the back of a .5% drop the day before. But the sharpest dive yesterday came from a specific JPMorgan (NYSE:JPM) trade.

Luckily this all came about after an 11% straight shot rally from two weeks ago. This week’s retracement is minor and not yet constitute a reason to add bullish positions in size. But my thesis is that SPY could use this swoon to build better momentum and crack into new highs soon. Yes, you heard that right, I am still optimistic about that possibility.

If I am right, the spy stock will be leading a new charge on Wall Street. Year-to-date, it and the DOW are doing twice better than the NASDAQ and the Russell 2000. Stocks must stall at resistance zones before they can punch through the ceiling. After a strong rally, investors need a rest to gather better momentum. Technically, there was room for a 5% to 6% drop without causing any lasting damage. This can happen by next Tuesday, so investors should spend time shopping for bargains.

SPY SPDR S&P 500 ETF Trust $452.41

SPY Stock Has Excellent Soldiers

The bullish SPY fundamentals are easy to argue because its constituents are healthy. All of the mega-cap stocks are breaking records perpetually. This is not the dot com bubble where we were chasing hope. The current actual results are strong even for stocks that fall on earnings. The disappointments are from overly exuberant estimates.

The economic conditions are also strong, and that’s why the Fed is trying to cool things down. Spending is at record levels, and unemployment is under 4%. This is hardly a situation where the economy is on the brink. Therefore, left alone and without negative extrinsic factors, stocks will want to rise. If the SPY can find footing near $436 per share this month, it can rebound with force. Before the rally could bring new highs, it will face resistance starting with this week’s high. Once the bulls overcome that, they can then tackle the last obstacles at the all-time high.

The Bears’ Advantages Are Not Permanent

S&P ETF (SPY) Charts Showing Potential Path to New Highs
Source: Charts by TradingView

So far the quarter scoreboard is not a good omen. The SPY stock is down 3%, which according to score keepers is the worst since the pandemic. Luckily nothing is “normal” therefore I won’t put much weight into that headline. Broad stroke stats are not that important to stock price trajectories. As long as the facts are strong I will assume the bulls are in charge. The game between “da bulls and da bears” is about even, and all headlines are aiding the bears. An ease on any of those fronts would bring an advantage to the bulls.

Of course we cannot be certain of how the geopolitical hotbed will end. So far none of the parties involved are showing any willingness to bend. This leaves the outcome of Russia’s invasion up in the air. My assumption is that this too shall pass because of financial reasons. Wars are expensive, and the world is just coming out of a costly pandemic. Funds are too scarce to open up new battlefronts, especially physical ones.

SPY Stock Should Bounce Back

Thus, SPY stock should do better the next two quarters this year.

Hopefully, they can do that before the “Sell in May” adage kicks in. At the speed of data dissemination, there will be a few early bird sellers on that.

Therefore, being cautious for the next few weeks would be prudent. An essential part of my current bullishness is its tactical nature. I don’t condone starting full size positions as a long-term investment up here. I am seeking either shorter term swings, or decade-long commitments. Anything in between risks suffering through long stints of disappointment.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.

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