S&P500: Strong Momentum BUT For Much Longer?

Initially, the S&P rallied hard from late April all the way through to mid-May. Then it paused for a couple of weeks, gave back a little bit of its gains, and prepared for its next move higher, which then came in the first half of June up until the 17th of June.

9 July 2024

Below is a transcript from Monday's Morning Market Hit video above.

Welcome to Shortview Trading. My name is Chris Watling. I'm the CEO and Chief Market Strategist of Longview Economics and Shortview Trading, and this is your Morning Market Hit for Monday, 8th of July. If you want to trade equity index futures, S&P 500 futures, NASDAQ futures, or DAX futures on a one- to two-week swing time frame, what factors do you need to consider as you decide whether to go long or short over the next week or two?

The first thing to consider when looking to invest and trade this market on a one- to two-week basis is how the current price action is playing out. The market once again last week broke out to the upside, continuing a pattern that's been ongoing since late April. You remember the first few weeks of April, the market pulled back, sold off into the 18th-19th of April, and since then it's been ratcheting higher in various phases.

Initially, as you can see on the chart in front of you, the S&P rallied hard from late April all the way through to mid-May. Then it paused for a couple of weeks, gave back a little bit of its gains, and prepared for its next move higher, which then came in the first half of June up until the 17th of June. Then on the 17th, another phase of pausing, consolidating those gains for a couple of weeks in the back end of June, before last week once again breaking out to the upside, up pretty much every day last week, and breaking out to new highs over the course of the back end of the week.

The question is, how long will this rally last? How much more upside is there? Because it's pretty clear that momentum is strong and it's to the upside. We like to measure that by looking at 10-day moving averages of key indices versus their 50-day. If we have two things happening, it's telling you where momentum's going. As you can see on this chart in front of you now, the S&P 500, shown with its 10- and 50-day moving averages, what we're looking for is a 10-day moving up, trending up, an upward sloping 10-day moving average, and we're looking for it to be above the 50-day moving average. When those two conditions are fulfilled, it's an indication that momentum is strong and it's to the upside. We see that as you can see on the chart in the S&P 500. We also have the same conditions in place for the NASDAQ 100: an upward sloping 10-day moving average and it's above its 50-day moving average.

Momentum has been strong for recent months, broadly speaking it's looking pretty good. But actually, if you start looking at how overextended momentum is and how overbought some of these markets are, you start to become a little bit more cautious. For example, take our technical scoring systems of the S&P 500 and the NASDAQ 100. Both of them are on or close to sell. Both of them are showing on a classic sort of overbought indicator, the market starting to look pretty overcooked here even though momentum is to the upside.

Then we do one other thing with our momentum indicator. We take that 10-day moving average I showed you earlier, pit it against the 50-day moving average, and we look for how far momentum's gone away, the 10 days moved away from the 50-day. How much above it is it? How overextended is momentum? Is it overcooked to the upside as well? Once you start doing that, you get this indicator we're showing you now: the overextended momentum indicator, where we pit the 10-day versus the 50-day, one relative to the other, to give you a sense of how overcooked momentum is as well to the upside. As you can see from this S&P version now, it's pretty close to signaling sell, similarly on the NASDAQ one. And of course, interestingly, if you look at that NASDAQ overcooked, overextended momentum indicator, you'll see it last signaled on the 17th of June, the very day that the market started to trend sideways for a couple of weeks as it paused in its uptrend. So no model is perfect, but this model is interesting. It's telling you this momentum has come a pretty long way and it's probably a little bit overextended to the upside. So highlighting a bit of caution makes sense at this point.

To see how we're playing this, please check your inbox if you're a subscriber. You should have had the email from the Daily Risk Appetite Gauge around 9:00 London time when it hits your email inbox. If you're interested in a free trial, please click on the link below, sign up, and we'll send you the Daily Risk Appetite Gauge for free for a bunch of trading sessions.

What are we watching this week? What are we focusing on over and above the models? Of course, the price action of the models is always critical, fascinating to watch closely, and we update those models each and every day in the Daily Risk Appetite Gauge publication. Over and above that, though, three key things: firstly, we have Jerome Powell up on the Hill giving his semiannual testimony to Congress in front of the Banking Committee, the Senate, and the House Financial Services Committee, starting today, Monday, and then the second part later in the week. That'll be watched closely for any hints on what they want to do with monetary policy, how many cuts, when, what they're looking at, any update on that. This is an opportunity for Jerome to do that.

The second big key theme is U.S. earnings out over the course of the back end of this week. We start on Friday in earnest to deliver on the second-quarter earnings season, starting with all the big banks on Friday. That'll be fascinating, watched closely, very important as you get into next week and beyond.

The final key theme is U.S. inflation out on Thursday, preceded by Chinese inflation on Wednesday. There's also some Michigan sentiment data on Friday as well. That'll be interesting and watched closely. CPI in particular in the States is a major focus of market participants this week.

So that's it from us. That's your Morning Market Hit for Monday, July the 8th. Thank you for listening. Please do subscribe to these videos on YouTube, follow us and click on the subscribe button, share on social media, or follow us on LinkedIn, Twitter, and/or Facebook. Thank you for listening, stay safe, and trade well.

FIG 1: S&P futures 60-day tick chart

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