Conditions are in place for a breakout to new highs for the S&P 500, according to Ari Wald, Technical Analyst at Oppenheimer.
Wald points to several pieces of evidence for his positive outlook, namely: Broadening internal strength, narrowing credit spreads, contrarian skepticism, stabilized commodity prices and returning strength in cyclical industries like Capital Goods, Diversified Financials and Semiconductors.
With regards to sentiment, Wald cites the latest Investors Intelligence weekly survey which says that over 40% of respondents expect a market correction (see Chart 1). This is the highest percentage of correction expectations since late September 2015. As such, Wald says, “… with the [Investors Intelligence] Bull/Bear ratio ticking back down to 1.5, we don’t see the type of extreme optimism that tends to characterize a market top.”
He says the S&P is approaching key resistance (see Chart 2), which goes from 2100 to its all-time high at 2134, and while he expects the index to break through, timing the breakout will be difficult. Nonetheless, his broad picture is positive and he recommends buying stocks with positive momentum, particularly within the Cyclical Industries (see Chart 3).