For the second consecutive week, the four major U.S. stock indices finished essentially unchanged. This recent sideways action leaves the S&P 500, Dow Jones Industrial Average and Russell 2000 all around 2.5% higher for the year, with only the tech-heavy Nasdaq 100 in negative territory, down 3%. 

#-ad_banner-#The benchmark S&P 500 continues to negotiate formidable overhead resistance at 2,104 to 2,135, as discussed in last week’s Market Outlook.

The strongest sectors last week were energy, consumer staples and utilities, while financials and consumer discretionary were the weakest.            

The table below shows that the biggest positive changes to inflows over the past one-week and one-month periods were in health care, according to Asbury Research’s ETF-based metric. Meanwhile, the biggest outflows during the past one-month and three-month periods came from consumer discretionary, which has declined by 2.5% over the past month compared to a 0.6% rise in the S&P 500. 

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As long as the recent assets flows into health care continue, we can expect relative outperformance from this sector in the weeks ahead.

3 Reasons For A Near-Term Pullback
In last week’s report, I said recent strength in market-leading semiconductor and small-cap indices tilted my bias toward an eventual break through major overhead resistance at 2,104 to 2,135 on the S&P 500, but I did not rule out a minor pullback first. A week later, that initial pullback seems even more likely based on three charts.

In the April 25 Market Outlook, I pointed out that the Volatility S&P 500 (VIX) was hovering near a multiyear low of 12, indicating an extreme in investor complacency. I noted similar complacent extremes had coincided with or led recent peaks in the S&P 500, but said that a sustained rise back above the VIX’s 50-day moving average would be necessary to trigger a market decline. 

The chart below shows that a sharp rise above the 50-day moving average at 14.54 took place on Friday.

As long as the VIX remains above its 50-day this week, the market is vulnerable to the near-term decline I’ve been warning of.

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The next chart, which plots the CBOE Put/Call Ratio along with the S&P 500, gives us another reason to believe the S&P 500 won’t break resistance without a pullback.

When the CBOE Put/Call Ratio is low, it indicates few put options are being purchased compared to call options. This implies a fearlessness among investors, which has historically preceded stock market peaks.

The chart below plots the five-day moving average of the CBOE Put/Call Ratio on an inverse scale, so it moves up and down with the S&P 500.

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Last week, the ratio retracted from the line that represents a low (i.e., least bearish) extreme in daily put versus call volume. We can see that similar extremes have closely coincided with most near-term peaks in the broader market during the past 18 months, making this a contrary indicator.

The next chart plots the S&P 500’s weekly seasonal pattern in the second quarter, based on data since 1957. The first week of June is the second strongest week of the entire quarter, after which the index historically slumps. The final three weeks of June tend to be some of the weakest in the quarter.

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So, although my overall outlook for the U.S. stock market is positive, the VIX, CBOE Put/Call Ratio and seasonal trends strongly suggest a multiweek pullback is likely to happen first.

Oil Prices Overextended, But Point Higher
After testing and holding major underlying support at $30.81 to $28.10 in February, spot West Texas Intermediate (WTI) crude oil prices have soared 96% to finish last week at $51.23 a barrel.

Not only are oil prices well above overhead resistance at the 200-day moving average, a widely watched major trend proxy, they’ve also exceeded the $49.45 October high. Meanwhile, the 50-day moving average, a minor trend proxy, has crossed above the 200-day, indicating long-term price momentum has turned positive.

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Oil prices have come a long way very quickly and are technically overbought. While this makes them vulnerable to a corrective decline, last week’s rise above $49.45 clears the way for more overall strength in the weeks and months ahead. The next two overhead resistance levels are at $59.13 and $61.37, 15% to 20% above Friday’s close.

Putting It All Together
As I explained last week, recent strength in the market-leading PHLX Semiconductor (SOX) index, an emerging bottom in the yield of the benchmark 10-year Treasury note and strength in a number of commodity markets are all intermediate-term bullish signals for the U.S. stock market. They suggest the S&P 500 will break above major overhead resistance at 2,104 to 2,135 in the next few months, which would clear the way for even more strength into 2017.

In the near term, however, this formidable resistance — combined with Friday’s spike in volatility, investor fearlessness and a seasonal tendency for the broader market to weaken into the end of June — suggests that we’ll see a multiweek pullback first.​

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