The S&P 500 continues its massive run higher as there doesn’t seem to be any reason why market participants should start to reprice assets lower. A Brexit deal had been reached few days before the deadline, COVID-19 vaccination had started, and just this week, the US Democratic Party regained control over the Senate, now holding a narrow 51 seats. All these combined are now contributing to an impulsive squeeze higher in the leading US index, which is why we would like to share three useful tips for trading it at the current elevated levels.
Tip #1 Watch how the big cap stocks perform
Although the S&P 500 is a selection of the 500 biggest stocks listed in the US, if we look at what companies weigh the most on the index, we’ll be finding that Apple, Amazon, Microsoft, Google, Facebook, and more recently Tesla, account for more than 50%. As a result, monitoring how these stocks perform will be very important, given they can drag the entire market.
Stocks may have become immune to vaccine news, but other variables like rising interest rates and a rotation into cyclical stocks could have a meaningful impact on big tech during the next few months.
Tip #2 Look for selling interest around key psychological areas
Trading in uncharted terrain is extremely difficult from a technical point of view. Shorting the market when only a handful of stocks can determine the outcome is making things worse, which is why traders will need to not fall into the confirmation bias trap and trade based on what the markets are telling them.
Psychological areas like 3,850, 3,900, or 4,000 will be closely monitored by large institutional players and we suspect that’s where the next corrective move could start. If the rotation into beaten stocks will continue, tech will have to suffer and thus the S&P500 could retrace some of its gains.
Tip #3 Respect the technicals
Traders are influenced by the mainstream media in constantly looking after reasons why prices have moved up and down. In reality, nobody can 100% accurately tell why any market move happened and now that we’re in a very uncertain environment, the best thing to do is “respect the technical”. The market can be exuberant for an extended period so as long as the price continues to break higher, you should be following the dominant trend. At some point, there will be signals a topping formation will start to unfold and that would be the time to think about taking the other side.