Major Moves

Looking back on the first half of 2019, I would be lying if I said anything other than it's been a wildly successful year in the stock market. One of the most encouraging aspects of this run higher is the breadth of the bullishness. Every sector within the S&P 500 – except energy, which is up 7.73% – is in positive territory by double digits for the year.

You can see this on the sector comparison chart below, which uses the following sector-based exchange-traded funds (ETFs) managed by State Street Global Advisors:

  • Technology Select Sector SPDR Fund (XLK)
  • Real Estate Select Sector SPDR Fund (XLRE)
  • Consumer Discretionary Select Sector SPDR Fund (XLY)
  • Industrial Select Sector SPDR Fund (XLI)
  • Consumer Staples Select Sector SPDR Fund (XLP)
  • Financial Select Sector SPDR Fund (XLF)
  • Utilities Select Sector SPDR Fund (XLU)
  • Materials Select Sector SPDR Fund (XLB)
  • Health Care Select Sector SPDR Fund (XLV)
  • Energy Select Sector SPDR Fund (XLE)

Perhaps the most exciting aspect of this chart is how bullish every sector has been during June and early July. The stock market is gaining bullish momentum. This tells me that – unless we see some surprisingly negative news during the upcoming earnings season – the uptrend on Wall Street is going to continue during Q3.

Chart showing the performance of major S&P 500 sector funds

S&P 500

Both the S&P 500 and the Dow Jones Industrial Average came into the Independence Day holiday at their highest levels ever. The S&P 500 is currently sitting at 2,995.82, and the Dow is sitting at 26,966.

I'll be interested to see what happens tomorrow when the market reopens after the holiday. Since the market will only be open for a day before it closes again for the weekend, I wouldn't be surprised to see both the S&P 500 and the Dow consolidate on relatively low volume – much like they typically do the day after Thanksgiving. After all, there's a good chance that many traders will choose to take advantage of an extended weekend vacation.

The one thing that could disrupt Wall Street's extended-weekend plans is a big surprise from the Bureau of Labor Statistics (BLS) when it reports the nonfarm payrolls and average hourly earnings numbers.

The analyst consensus is looking for 164,000 new jobs to have been created during June. Based on the ADP nonfarm payrolls miss on Wednesday – showing 102,000 new jobs compared to the expected 140,000 – nobody is going to be too surprised if the BLS number is slightly lower than expected, but a big miss to the downside could cause a little more volatility.

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Chart showing the performance of the S&P 500 Index

Risk Indicators – Margin Debt

I'm always looking for confirmation of trader sentiment on Wall Street. If I can confirm traders are bullish, I feel more confident in my bullish outlook. Conversely, if I can confirm traders are bearish, I feel more confident in my bearish outlook. After all, traders drive prices.

One of my favorite ways to see just how bullish traders are is to look at how much money traders are borrowing to buy the stocks they are trading. Traders can borrow up to 50% of the purchase price of a stock – according to Regulation T of the Federal Reserve Board. So if a stock costs $100, you only have to use $50 of your own money to purchase the stock. You can borrow the other $50.

Borrowing money to buy stocks is referred to as buying on margin, and the amount of money you have borrowed to buy stock is called "margin debt." Tracking the total amount of margin debt being used to buy stocks can give you a good sense of how confident traders are. Confident traders tend to borrow more. Nervous traders tend to borrow less.

Margin debt rose to an all-time high of $668,940,000,000 in May 2018. It then began to consolidate in mid-2018. By the end of 2018, however, margin debt started to retreat, falling to $607,645,000,000 in October and then dropping to its recent low of $554,285,000,000 in December 2018.

Since December 2018, margin debt levels have been bouncing back and forth as they have risen off their recent lows. Interestingly, margin debt dipped to $568,751,000,000 in May – which is farther than the indicator had pulled back during its most recent pullback in March – according to recently released data from the Financial Industry Regulatory Authority (FINRA).

This pullback in margin debt lines up perfectly with the pullback on the S&P 500 when it completed its head and shoulders bearish reversal pattern at the end of May. Knowing that the S&P 500 recovered and went on to establish a new all-time high in June tells me that the margin debt number for June is likely going to be much higher, as traders have likely borrowed much more to take advantage of the rally.

FINRA releases its margin debt data a month after the fact. That's why we are just now seeing the data for May. We'll have to wait until the last week in July to confirm what I'm expecting to see in June's data. This is a promising sign for the S&P 500.

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Chart showing levels of margin debt

Bottom Line – Fireworks on Wall Street

We've already seen plenty of fireworks in the stock market this year. Enjoy the fireworks outside tonight, and get ready for more to come on Wall Street.

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