The S&P 500 Index (NYSEARCA:SPY) has been in a very narrow range for over 3 months now. I recently proposed an actionable idea to buy the S&P on the breakout above the 2400 level, or to sell the S&P on the breakdown below the 2300 level. As the chart below shows, the S&P has been on the verge or a breakout for the last 2 weeks. Yet, it's unable to decisively break the key resistance.
So, how to play the market now? These are the three key real-time market indicators that can guide the stock market strategy: 1) the reflation indicator, 2) the high-beta indicator, and 3) the sentiment indicator.
1) The reflation indicator
The stock market (NYSEARCA:DIA) breakout (or breakdown) would ideally be triggered by a fundamental event. Thus, a true positive fundamental change would be instantaneously evident in the rising yields on 10-Year Treasury Notes (NYSEARCA:TLT) - as the real-time reflation indicator. The chart below shows that the yields are currently holding above the key 2.30% level, and rising.
The trend of rising yields to the key resistance of 2.60% is bullish for the stock market (NASDAQ:QQQ) - and it supports the stock market breakout based on the reflation thesis.
2) The high beta indicator
Additionally, the broader stock market breakout would have to be confirmed and led by the high-beta stocks, or specifically the relatively riskier small stocks, as measured by the Russell 2000 Index (NYSEARCA:IWM). As the chart below shows, Russell 2000 has been in an extremely tight range (3350-3400) for almost 6 months - this is very rare.
Just recently, the Russell 2000 Index broke the key resistance 3400 level, only to quickly retreat below the 3400 level - which actually was a false breakout and bearish for the broader stock market. Nevertheless, the Russell 2000 Index is still just below the 3400 level - which is an important real-time risk-on indicator that must be followed.
A decisive breakout above the 3400 level on Russell 2000 would be bullish for the broader stock market.
3) The Tesla (NASDAQ:TSLA) Sentiment Indicator
The stock market breakout (or breakdown) can be also triggered solely by the change in sentiment. As previously explained, Tesla stock can be used as a real-time sentiment indicator that can be generalized to the entire stock market.
Just recently, Tesla had a "miss" on the earnings report, which triggered a 5% sell-off. However, Tesla stock quickly recovered, and now is approaching the all-time highs. This is short-term bullish for the broader stock market, as it shows a positive sentiment in the stock that has been branded as a "lottery ticket" or "a bubble basket stock".
Currently, 1) The reflation indicator is bullish; 2) The high-beta indicator is neutral, with bearish bias due to a false breakout; 3) The sentiment indicator is bullish.
Thus, we have a situation where the broader stock market is likely on the verge of the breakout.
However, the situation can quickly change, and these real-time indicators will confirm the changes. I will update accordingly, so follow for the updates.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.