Hi everyone, welcome back to the blog!
I think the S&P500 will still retest the low 270s to 280 level, which is about 15% lower from here. From a risk/reward standpoint, I think it’s equally likely we move up 15% or down 15% from here, meaning the risk/reward ratio is only 1:1. I would need to believe that it’s just as likely for the index to move up 30% as it is to drop 15% (risk/reward of 2:1) for me to consider buying the index here.
Here are 3 reasons for why I think we move lower:
- Most of the market gains are still led by technology stocks, namely the FAAMG stocks (Facebook, Amazon, Apple, Microsoft, and Google). If and when these companies sell off, the whole market will get dragged significantly lower.
- Momentum is waning, as you can tell from the bearish RSI divergence (same or higher price high, but same or lower RSI reading).
- Markets are very expensive from a historical standpoint if you look at the P/E ratio and Market Cap to GDP ratio.
However, 3 reasons why we might not move lower are:
- The market has mostly stopped reacting negatively to coronavirus news (reacts positively though).
- The Fed continues to pump liquidity into the market.
- Sentiment is still extremely bearish (~20% bullish, ~50% bearish, 30% neutral), meaning there is likely a lot of sideline cash waiting to buy dips. This usually means we will continue to move higher, at least in the short term, unless something unexpected happens (which will probably be non-coronavirus related).
Let’s look at the daily charts of SPY and QQQ.
The QQQ is also building up a bearish RSI divergence, but is holding up quite strong near all-time highs. Daily chart below:
Thanks for reading and enjoy the rest of your weekend!