Moving On Up, To A New High
The S&P 500 has been moving up steadily since hitting its March lows. The move is driven by a combination of factors that include 1) the correction was overblown 2) the pandemic shutdown was not as bad as feared 3) the rebound is stronger than expected and 4) the outlook for earnings from pandemically insulated stocks continues to brighten. Basically, what we have here is a market melt-up of epic proportions that has yet to run its course.
Today’s economic data fits right into this theme. The Markit IHS flash PMI missed consensus by a small margin but is expansionary and backed up by more substantial data. The ISM Manufacturing Index rose more than expected over the past month to hit a post-correction high of 54.2 and there is more data due out this week. The most important piece will be the NFP but let me remind you, the headline number is not the one you want to trade on and there are more factors than one to consider. Regarding the labor data, there is the labor component of the ISM reports as well as the ADP and Challenger reports. The Challenger report is one of the most important in my view because it includes a read on planned hiring. Yes, job losses are staggering and lingering but so too is the impetus to hire.
Regardless, it’s always the earnings that drive the market and right now the earnings are looking good. Granted, not all companies or sectors are doing so well but the ones that are are doing great. Staples, tech, home improvement, and digital entertainment are all seeing robust demand. The major theme among the earnings reports is that Q2 results are better than expected and the analysts consensus for 2020 and 2021 is too low. What this means to me is upward revisions to support share prices and new highs for the S&P 500.
The Technical Picture Is Good; How Good Is Yet To Be Seen
The S&P broke to a new high, not a new all-time high, with today’s open and looks like it will easily hit the all-time high. The all-time is now less than 3.5% away from price action and within an easy strike. The question is how strong the move will be. If the market is able to move up to a new high the long-term outlook will remain bullish. If not, another correction is likely in order.