It’s a breakout!

The S&P 500 finally closed above the 2815 resistance level yesterday. The index is now trading at its highest level since early February. Financial and technology stocks are leading the way higher. And lots of financial television talking heads will tell you that the bullish momentum will now carry the broad stock market to new all-time highs.

They could be right. But, then again… they could be wrong.

Gosh… I would love to be bullish right here. I’d love to join the market’s cheerleading squad, throw my pom-poms in the air, and yell, “GO MARKET!”

After all, it wasn’t all that long ago that I suggested stocks would have a good summer. And the S&P 500 might even scramble its way back up to new highs.

But there’s a problem… Outside of the financial and technology sectors, there wasn’t much participation in yesterday’s breakout.

Bank stocks rallied. The financial sector ETF (XLF) gained 0.29%. Technology stocks rallied, too. XLK – the technology ETF – popped 0.55% higher.

But a lot more sectors lost ground yesterday…

Consumer discretionary stocks (XLY) lost 0.3%. The Semiconductor Index (SOX) dropped 1.1%. The transportation sector (IYT) gave up 1.5%. Retail stocks (XRT) were discounted 1.6%. Homebuilders (XHB) got hammered 1.73%. And the biotech sector (XBI) lost 2%.

It’s not much of a breakout when there are far more sectors trading lower on the day than there are trading higher. Of course, that doesn’t mean the market can’t move higher from here. It certainly can. But, as I’ve argued for the past several days, any gains here in the short term are likely to be given back over the next few weeks.

There just isn’t enough fuel in the market’s tank to sustain a significant breakout under the current conditions. The Volatility Index (VIX) is too low. Investor sentiment is too bullish. Many of the daily technical indicators are closer to overbought than oversold.

And yesterday, there were more sectors declining than advancing…

To me, this sort of action looks more like a bull trap than a legitimate breakout. It’s the sort of action that gets the bearish traders to throw in the towel, and it coaxes money in from off of the sidelines to chase stocks higher, just before the market turns around and heads lower.

Traders should be cautious here. You’ll probably get a better opportunity to buy stocks in the weeks ahead.

Best regards and good trading,

Jeff Clark

Reader Mailbag

Is this the breakout to truly end the correction? Here’s how reader Mike sees it…

Gut feeling… not expecting a tariff issue resolution with China until October 2018. Market will be choppy to slightly higher in the month of July, no new high, choppy in August, down in September.

– Mike

Click here and let us know how you see it… and how you’ve prepared. And feel free to send along any other comments or questions you might have.