Can the Stock Markets Continue the Upward Momentum Despite Poor Economic Data?

The S&P 500 has gained about 30% from it’s March low and has erased more than half of the losses from the decline that started in February.

A bulk of the investment banks have taken a bullish stance and believe the bottom for the equity markets are in. Media outlets are mostly releasing articles of a bullish nature, in line with the current trend in the markets.

But retail investors don’t appear to be all that bullish. The latest survey from the American Association of Individual Investors shows that only 35% of investors think the markets will rise in the next 6 months while 22% of the surveyed group held a neutral view.

One thing that stands out to me in the current rally is that the markets are not showing much concern for poor economic data. For example, this week’s US jobless claims report showed another 5.2 million people filing for unemployment claims. And over the last four reports, the running total indicates that just under 22 million people in the US have lost their jobs.

The first major rise in the unemployment claims report was on March 26, three days after the S&P 500 hit a bottom.

What this tells me is that the markets have already taken into consideration that economic data will be bad from this point on, and yet are still comfortable buying stocks.

Further, I think its more important now than ever to pay close attention to price action. That is, how the price moves relative to ongoing news flows and economic data.

Frankly speaking, if equity markets are able to gain despite bad data such as the recent string of jobless claims figures and the retail sales report released this week, it is not a good sign for bears.

When and Where I am Looking to Short the Market

To be clear, I’m not eager to short the markets. However, while I do think countries around the world have made good progress in containing the Coronavirus, I’m not convinced it warrants a 30% gain in the S&P 500.

Further, the prospect of the US index rallying to record highs does not appear probable, at least at this time.

Having said that, I’m looking for something specific to happen that involves technical analysis and price action.

The above weekly chart of the S&P 500 shows that it is approaching an important price point at $2942. The same level served to hold the index lower in 2018, and then once again in the first half of 2019.

In addition to the horizontal level, there is a Fibonacci retracement that comes in close proximity to create a technical resistance confluence.

If you don’t follow technical analysis, Fibonacci and horizontal levels may not make a lot of sense. But the take away here is that other technical traders will likely be focused on the same area which on its own can draw sellers.

But more important than the levels is the price action in the markets. Judging by the recent upward momentum, it appears very plausible this technical area will be tested next week.

An important economic release next week will be the US purchase managers’ survey data for the manufacturing industry. The price action that surrounds the data release could offer a tell.

If the report comes in weak, and the markets continue to rally, there won’t be much appeal in taking a short position. On the other hand, if the resistance area outlined above holds, and the markets start to show some weakness, I think the odds favor a pullback in stocks to pare some of the recent outsized 30% gain.