SP500: outlook and research
One of the main supporting factors of stock market strength has of course been a weak USD but we now have a bullish extreme in stocks and a bearish extreme in the USD. Despite stocks being firm in the last two weeks the DXY US Dollar Index has actually firmed up…
On the chart below from Macro Charts we can see the USD sitting at a key level of support with speculators holding their biggest short position since 2011. In our previous posts we have been bullish for more USD strength and if it continues the odds of a correction in the SP500 will increase.
In terms of the SP500 investors have bought it on the view the global economy will make a quick recovery from the pandemic this year, but this is not supported by economic data and vaccines will take time to work. The good news is getting priced in and we are at a bullish extreme. Below some key levels to watch in the SP500 and charts in relation to sentiment which show the size of the extreme – the majority are bullish stocks and see no end to stock market strength but that’s always the case when you get a big correction in stocks.
SP500 DAILY CHART: We are trading near multi year highs but the volatility is low – In terms of a correction to the downside the level to watch is 3800 and if we can break it due to the size of the bullish extreme we would expect a possible correction to the levels indicated.
SP500 Sentiment Extreme Readings
“BofA’s “Long Term” Bull & Bear Indicator: Has been the most accurate of all sentiment indicators BofA has been in buy mode during the entire rally. Last week it reached very red at 7.1 and has now increased to 7.2 Which warns of a reversal.
The BCA Research “Equity Capitulation Index” is at its highest level since 2010 and 2004, two readings that were followed with 10% or more to the downside.
In terms of the options market the amount of call options surge in call bought recently reached a record high and big call option buying in the past has warned of all significant corrections.
In terms of investor bullishness of stocks going forward it has increased dramatically as the rally has unfolded.
Investors are now so confident there taking bigger risks than ever as optimism about the rally is continuing remains high.
In terms of the stock market rally it has been the biggest of all time and no one sees an end to it but there are plenty of warning signs…
The Key Level to Watch in the DXY
DXY DAILY CHART: The USD has worked its way back above the 0.900 level and the key level to watch now is the 91.00 level if this breaks it will warn of further upside in the USD and potentially weakness in stocks – the USD short position is the biggest since 2011 when the USD went on a major rally
The rally of course can continue as bullish extremes can last a long time but the warning signs are there of a reversal. The USD hasnt fallen despite the market being heavily bearish and more
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