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SPX has now reached 5800, but time-wise, sell signals look premature

Short-term trends in US Equities remain bullish, and Monday’s gap helped price push up to test and exceed the upper end of my technical target for SPX (5750-5800) without much evidence of reversing course. Given that no time-based factors have appeared to confirm that 5800 might have some importance, it still looks early for a short-term peak. Meanwhile, “Safe-haven” trades like Gold, Treasuries, Japanese Yen, and/or Swiss Franc have all steadily weakened given the signs of tariff and geopolitical risk de-escalation in the last week.  While Technology has outperformed every other major Sector in the last month on an Equal-weighted basis, there has been some evidence of outperformance by Equal-weighted SPX over SPX since early May. Thus, a broad-based rally has shown initial signs of materializing, which is benefiting Small-cap stocks at a time when many investors remain skeptical. Overall, it will be important to watch out for any evidence of breadth starting to dry up on this rally, and/or signs of US Equity indices starting to reverse course following May expiration. However, for now, a high-volume, positive market breadth rally, which closed near the upper quartile of Monday’s range, hasn’t provided the necessary signal that a pullback is imminent. While I expect that the road likely gets a bit tougher from here over the next month, it’s hard to fade rallies that haven’t begun to show much sign of fatigue. There could be some sign of this starting later this week or early next week, but at present, it looks wise to stick with this new uptrend for now.

As shown below, $SPX gapped open nearly 3% and finished the session near the highs of the day.  Volume expanded by 10% over the average of the last month while breadth finished at around 3/1 positive. Until there are signs of some type of a reversal to new multi-day lows, or we see the rising 9-day moving average (m.a.) undercut, I believe it makes sense to stick with this trend this week heading into May expiration.

Options data from Bloomberg shows that this Friday’s May options expiry is “Call-heavy” with about 2-4 times call-to-put values on a delta notional basis rolling off.  To some extent, one can say this has forced dealers to chase the rally, but the area near $SPX 5900 very well could serve as a magnet, given the significant positive gamma strike just above current levels.

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