Market Analysis: The Key to an S&P 500 “Buy” Signal

By TradeSmith Editorial Staff

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The S&P 500 tested resistance, briefly trading above 4,200 back on May 18, before closing at 4,198.

Wall Street insiders suggested this was simply the market’s response to the debt-ceiling wrangling happening in Washington — and not a signal that a new bull run was starting.

But, as respected TradeSmith analyst Wade Hansen hinted the week before, a move like this could confirm a reversal that appears to be forming among his favored technical indicators. Today we’ll revisit that discussion against the backdrop of at least one bellwether indicator validating Wade’s thesis, including:

  • How the component sectors of the S&P 500 work to drive the index.
  • Our favorite method for gauging investor sentiment, and what that sentiment is telling us now.
  • What to watch for to confirm a real bull-market surge in stocks — and avoid a “suckers’ rally” trap.

The S&P 500 is composed of 11 sectors, each related to a specific business, like energy or information technology. And each sector responds to — and is driven by — unique sets of catalysts.

Therefore, the entire S&P 500 doesn’t move in the same direction. In fact, some sectors are found to move inversely, and are useful for gauging sentiment.

For example, when the Consumer Discretionary Sector Select SPDR ETF (XLY) moves up, it indicates economic confidence, and says a growing number of people feel good enough about their prospects to spend on such luxuries as televisions, home electronics, and more.

A relationship between XLY and the Consumer Staples Sector Select SPDR (XLP) exists that provides a clue about investor sentiment. When the XLP is up, it tells us consumers are cautious — or downright fearful — about the future and are restricting their purchases to absolute necessities. When one is up, the other is down.

Wade reveals in the video what this relationship says about a possible bottom forming and potential near-term reversal toward a more bullish 2023.

Comparing the XLY to the XLP on the Long-Term Relative Strength chart, Wade highlights the progressive direction of the highs and lows and what each portends. It’s nearly seven minutes of eye-opening market insight that’ll give you an understanding of what’s to come — and make you a better investor.

And what happened on May 18, could be an important bit of the confirmation he was looking for. Check out Wade’s analysis to see what else he wants you to watch for — ahead of the stock market’s next big move.

Click Here to Watch Wade’s Take