Last week, S&P 500 approached the key resistance at the 200 day moving average, right around the 2995 level. The failure the breach this level could signal the end of the bear market rally from the March lows, and the resumption of the bear market. Today, S&P 500 strongly breached the 200dma to the 3015 level, however, it sold-off to below the 200dma – failed break-out.
Why the strong move up?
The narrative is that the market is optimistic due to the re-opening of the economy post the great global lockdown, and also due to some optimism regarding the potential covid-19 vaccine. In reality, the fundamentals are still horrible, and could likely get worse. As a result, many traders are shorting the stock market. Bloomberg points that there is a large short position that needs to be resolved. Most of these shorts have their stop-loss orders above the 200dma, and the expectation is that once the market closes above these levels, short covering will fuel the stock market even higher. Thus, some speculators have an incentive to buy stocks and force shorts to cover – this actually explains most of the recent bear market rally – short covering.
Why the sell-off?
Late in the day, Bloomberg announced that U.S. Weighs Sanctions on Chinese Officials, Firms Over Hong Kong. This is part of the broader trend of de-globalization, and investors have shown willingness to sell at these types of headlines.
What to expect next?
The broad fundamental headlines are likely to remain negative. Partial reopening has been priced in (and overpriced). Thus, the bear market is likely to resume. At this point, short covering remains the only reason to expect higher stock market prices over the short term, unless the large short position has been covered. We’ll see another attempt at the 200dma breakout.