Market Breakout Needs To Hold

May 19, 2023
Author: Peter Stolcers, Founder of OneOption

The fundamentals are not strong, but the technicals are. Follow price.

PRE-OPEN MARKET COMMENTS FRIDAY – You can hate on the market fundamentals all you want, but the technicals are strong. The S&P 500 broke through horizontal resistance on heavy volume yesterday and it is above all of the major moving averages. We also have a compression breakout on a daily chart. If this breakout holds for a few days, we will see another leg higher.

There is optimism that the debt ceiling will be raised and that both sides will strike a deal in the next few days. Even if they hit a snag, they will pass a temporary funding bill while they iron out the agreement. Traders never viewed a default as a big threat and a declining VIX tells us so.

By the same token, the market does not see the regional banking crisis as a threat. We saw this casual attitude in 2008 after the Countrywide Financial failure. When a couple of months passed without another bank failure, buyers stepped in. Commercial real estate could be an issue for many regional banks and those property prices are falling quickly as the workforce permanently stays remote. Commercial real estate prices were down 1% in Q1 according to Moody’s and that is the first decline in more than a decade. Rating agencies say that prices are down 15% Y/Y and banks are selling their holdings to meet regulatory requirements.

The market rally has been very narrowly defined and a dozen tech giants account for all of the gains in the S&P 500 this year. The forward P/E for the index is 18 and that is lofty. The forward P/E for QQQ is 28 and that is also high.

Inflation continues to stay elevated and there is a 38% chance of a 25 basis point rate hike in June. The market is pricing in a rate cut in Q4 and there is a major disconnect between what is priced in and what the Fed is saying/doing.

Job growth remains strong and as long as the economic numbers are stable, the “soft landing” scenario is keeping buyers engaged.

Many European markets are at all-time highs and Japan’s market is making fresh 33 year highs.

Regardless of the fundamentals, the market wants to go higher. No additional bank failures and strong job growth are keeping buyers engaged even with the Fed tightening. If this market breakout holds and advances for a week, I will shift to a neutral to slightly bullish bias.

Buyers have been in control and they are going to flex their muscles now that they have a breakout. There is no reason to chase the opening gap higher. Sellers have been engaged the last month and they will not go quietly. Watch for selling early in the day (profit taking). 1OP is spiking so wait for that bearish cycle. Once support is confirmed, favor the long side. There are many more good looking longs than shorts. Focus on stocks that have broken out on heavy volume. We need heavy volume. Yesterday in the middle of the session I mentioned that the likelihood of a good move was high because the volume was heavy. That is the key ingredient to any sustained move.

Support is at $417.50 and resistance is at $425 (High+ trendline).

This is a nice technical breakout through resistance on heavy volume after a compression.

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