Stocks Near Record Highs, but Risks Continue to Mount

The S&P 500 index reached an all-time high last Wednesday, which helped stocks close the week and month on a positive note. Strong second quarter financial results have fueled the rally over the past three months, but President Trump’s tentative NAFTA deal with Mexico and resumed talks with Canada were largely responsible for the recent boost.

Despite the ongoing rally, risks continue to mount both in the U.S. and around the world. President Trump is expected to impose tariffs on another $200 billion worth of Chinese imports after the public comment period concludes this coming week. China has threatened to slap on another $60 billion worth of tariffs in response to the new tariffs that could pressure the markets.

These geopolitical risks are magnified even more given that U.S. stocks continue to trade near all-time highs. The S&P 500’s 12-month forward P/E ratio stands at 16.8x, which is well above the ten-year average of 14.4x. The forward looking guidance from S&P 500 companies also appears bearish, with 72 companies issuing negative EPS guidance and only 24 issuing positive guidance.

Next week, traders will be closely watching several key economic indicators, including motor vehicle sales on September 5, the ADP employment report and factory orders on September 6, and of course, the employment report on September 7. Investors will also be keeping an eye on any new developments in NAFTA talks and China tariffs over the coming week.

S&P 500 Reaches New Highs

The SPDR S&P 500 ETF (SPY) briefly broke out from trend line resistance to all-time highs last week before moving back below the trend line support. Traders should watch for a breakout from these levels toward R2 resistance at $293.44 or a breakdown to R1 support at $287.39 over the coming week. The RSI is hovering near overbought conditions with a reading of 67.52, but the MACD remains in a bullish uptrend for the time being.

Industrials Give Up Ground

The SPDR Dow Jones Industrial Average ETF (DIA) managed a small gain last week after moving off of trend line resistance levels near $262.50. Traders should watch for a rebound from R1 support at $259.25 to re-test trend line resistance or a breakdown lower to reaction highs at around $255.00. Looking at technical indicators, the RSI appears a bit lofty at 63.89, while the MACD could see a near-term bearish crossover.

Tech Stocks Continue Higher

The Invesco QQQ Trust ETF (QQQ) moved higher last week after breaking out from prior highs and R1 resistance at $183.03, but the index remains within its bullish price channel. Traders should watch for a move toward trend line and R2 resistance at $189.61 or a move lower to re-test R1 support over the coming week. The RSI moved into overbought territory with a reading of 70.67, but the MACD remains in a robust bullish uptrend.

Small Caps Trend Higher

The iShares Russell 2000 ETF (IWM) moved steadily higher over the past week following its breakout from an ascending triangle earlier this month. Traders should watch for a breakout from R2 resistance at $173.85 to fresh highs or some consolidation above trend line and R1 support at $169.86. As for technical indicators, the RSI appears lofty at 67.66, but the MACD remains in a bullish uptrend for the time being.

Charts courtesy of StockCharts.com. Author holds no position in the stock(s) mentioned except through passively managed index funds.