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S&P 500 technical analysis for August: prices should go higher but the economic outlook is not that positive

While the seasonals are generally negative, the technicals point to higher prices

The path of stock prices in the S&P 500 index are continuing to diverge despite some reversal of the trend that occurred in mid-July. During the past two months, cyclical-growth stocks have outperformed value stocks because concerns over the spread of Covid-19 continues to plague the United States. During mid-June, value stocks rebounded when US states started to reopen. But as new cases of Covid surged in the US during mid-July it has become clear that reopening happened too soon. While certain technology and cyclical stocks such as Apple, Amazon, Microsoft and Facebook hit all-time highs, airline shares, leisure and hospitality companies continued to slump. 

The June data was stronger than anticipated but this was already priced into the S&P 500 index. Looking forward to Q3, the economic outlook is not as rosy. Retail sales in June jumped 7.5 per cent month over month and 1.1 per cent over the prior year, topping expectations for a 5 per cent rise. The caveat is that US interest rates are at zero and the 10-year Treasury note yield is near 60 basis points making it unattractive to invest in securities other than US stocks. 

The seasonals are negative and implied volatility remains elevated

Historically, the S&P 500 index has struggled in August. During the past 10 years, the S&P 500 index has declined 60 per cent of the time with an average loss of 1.3 per cent. This compares to a robust July when the large-cap index rises 80 per cent of the time for an average gain of 2.2 per cent. Ahead of a choppy August, implied volatility on the S&P 500 index measured by the VIX volatility index remains elevated. The current reading on the VIX is 28, well below the highs seen in August near 86, but nearly double the 2019 average of 14.

Current technical analysis of the S&P 500

Technically, the S&P 500 index has broken out above trendline resistance and is poised to test the all-time highs. The 10-week moving average has crossed above the 50-week moving average which means that a short-term uptrend is now in place. 

Short-term momentum is positive as the fast stochastic generated a crossover buy signal. The current reading on the fast stochastic is 92, well above the overbought trigger level of 80, which could foreshadow a correction. 

Medium-term momentum is also positive as the moving average convergence divergence (MACD) histogram is printing in the black with an upward sloping trajectory which points to higher prices.

S&P 500 analysis: the bottom line

Earning during the balance of July will likely shed further light on the direction of the large-cap index. 

While the seasonals during August are generally negative, the technicals point to higher prices. The balance of July should be robust, and prices of the stock in the S&P 500 index are likely to continue to grind higher during August.

USA 500
Daily change
Low: 3201.6
High: 3229.4

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