The S&P 500/SPX (SP500) and markets in general are at another inflection point here. Coronavirus cases are surging, and the S&P 500 is at a critical technical junction. Furthermore, Q2 earnings season is starting, and there are plenty of uncertainties (including corporate earnings and forward guidance) going forward.
Therefore, there is risk to the downside for the SPX/stocks in the near to intermediate-term in my view. Nevertheless, there is always a bull market somewhere. So, let us talk about the S&P 500 and certain markets that could outperform the most widely followed stock index going forward.
Let us begin with what is likely the most widely followed major average in the world, the S&P 500.
Source: Think or Swim, Ameritrade
We see that S&P 500 futures were dangerously close to critical support around 3,100 Friday morning. I cannot stress enough how crucial it is for the SPX futures to get back above the 3,150-3,180 level. A decisive penetration of this level would open the door to 3,200-3,220, then ATHs, and ultimately new ATHs.
Quite remarkably, SPX futures closed at 3,179.5 on Friday, making about a 60 point, or roughly a 2% rebound throughout the session.
Do I think this scenario, where the SPX goes to new ATHs relatively soon (3-4 months) is likely? No, but it is plausible, so it should be considered as a viable scenario.
However, I am concerned about the downside in the near-term. If the SPX does not breakout above 3,180, then 3,200 it will likely head back down, and if the 3,000-2980 level breaks down we could be looking at a much more serious correction. If this extremely important level gets breached, I believe the SPX could head to around 2,750 next, a correction of around 13.5% from current levels.
Yet, the larger correction is only a threat if the critical 3,000 level gets broken, which is still questionable for now. Nevertheless, if the market makes a move lower towards 3,100, the odds of breaking below 3,000 naturally begin to increase.
Furthermore, it is not likely that big tech can continue to lead markets indefinitely. Many stocks in the big tech segment have had extraordinary moves, make up a huge percentage of the SPX, and may be setting up for a correction.
Remarkably, the “Big Five” now account for roughly 25% of the S&P 500’s weight.
There is a Bright Side
Gold continues to shine as it climbs towards new highs
Gold is in a key range now, $1,800 – $1,825/$1,830. Due to unprecedented Fed easing and other factors, I expect gold to continue to climb higher.
Even if Golds break below $1,800, I expect the “fall” to be very marginal:
Base case pullback $1,780-1,800, worse case $1,750, and in a worst case to around $1,710-1,700. The worst case scenario would demonstrate a correction of around 5% in gold, quite significant for the gold market and very unlikely in my view.
$1,800 may not even break, as we see what appears to be a double bottom in gold….