Is a Breakout Coming? S&P 500 Takes Off Near a Key Level

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Is a Breakout Coming? S&P 500 Takes Off Near a Key Level

Stocks took off last week as investors look for the coronavirus crisis to fade.

The S&P 500 rose 3.2 percent between Friday, May 15, and Friday May 22. The index is back to its highest levels since early March and its second straight positive month. Transports had their best week relative to the broader market in more than a decade.

While the Nasdaq-100 previously led the bounce, economically sensitive companies that fell the most during the crisis outperformed last week. That also included small caps, financials and industrials. Will they prove to be long-term bargains if Americans go back to working, driving and shopping soon?

Jobless claims missed estimates for the tenth straight week but the oil glut eased again. Mortgage data showed strong demand for housing and there are new hopes for a coronavirus vaccine. Those positive signs follow a period of extreme negativity, making it harder for traders to remain bearish.

The rest of the holiday-shortened week may be relatively quiet. However there are some potential risks to keep in mind.

S&P 500, daily chart, with select moving averages.
S&P 500, daily chart, with select moving averages.

Can the S&P 500 Break 3,000?

The S&P 500 has recouped more than half its losses since the coronavirus crash started in late February. However the index has stayed under its 100-day and 200-day moving averages. That could make some technicians fear it’s hitting resistance.

It’s also below the psychologically important 3,000 level and near the zone where it consolidated in early March.

Is This a Dash for Trash?

Another potential risk is that last week’s strength in underperforming sectors was actually a “dash for trash.” That’s when investors, eager to deploy capital, complacently hunt for opportunities in the weakest corners of the market.

Biggest Gainers in S&P 500 Last Week
L Brands (LB)+39%
United Airlines (UAL)+28%
Norwegian Cruise Line (NCLH)+27%
Harley-Davidson (HOG)+24%
Kimco (KIM)+24%

Homebuilders were the strongest major industry group, followed by airlines, hotels and oil drillers. Healthcare, consumer staples and utilities fared the worst.

What About Bitcoin and Gold?

Gold miners, the best-performing bucket in the market this year, pulled back slightly last week. However, silver and silver miners remained positive. Will buyers return to precious metals in the next few weeks, especially with a Federal Reserve meeting on June 10? The central bank has lit a fire under the space with super-low interest rates.

Bitcoin may be another area to watch after that “halving” took place on May 11. That means less new supply is getting created at the same time the cryptocurrency is trying to break an 11-month downtrend.

Is China a New Risk?

An old fear also reemerged last week: political risk and China. It started after President Trump blocked chip sales to Huawei. A Senate bill then seemed to threaten some Chinese companies‘ access to U.S. markets. Beijing followed with an apparent crackdown on Hong Kong.

Dow Jones Transportation Average ($DJT), weekly chart, with relative strength vs. S&P 500.
Dow Jones Transportation Average ($DJT), weekly chart, with relative strength vs. S&P 500.

The events triggered some worries of renewed tension between Washington and Beijing. Investors will now likely follow the situation, although there have been few signs of escalation on either side.

The Week Ahead

There are a few economic numbers and earnings reports this week. Investors may also focus on Novavax (NVAX) after the company told investors to expect preliminary data on its coronavirus vaccine in July. NVAX more than doubled earlier this month after receiving a $384 million investment from a healthcare foundation backed by Bill Gates.

Biggest Decliners in S&P 500 Last Week
Campbell Soup (CPB)-9.7%
Beckton Dickinson (BDX)-7.4%
Newmont (NEM)-7.1%
Citrix Systems (CTXS)-6.6
Amgen (AMGN)-5.7%

Today’s main events are consumer confidence and new home sales.

Thursday features jobless claims, crude-oil inventories, durable-goods orders and revised gross domestic product. Salesforce.com (CRM), Costco (COST), Ulta Salon (ULTA) and Nordstrom (JWN) report earnings.

The week concludes Friday with personal income and spending data, along with a speech by Fed Chair Jerome Powell.

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