The U.S. stock market put in another strong performance last week, led by the small-cap Russell 2000, which gained 2.4% and is now up 6.1% for the year. More importantly, the benchmark S&P 500 has spiked higher by 170 points or 8.5% since the June 27 Brexit low, which keeps my 20,400 upside target in the bellwether Dow industrials alive.

Moreover, both the S&P 500 and Dow industrials set new all-time highs next week, which should help to grease the skids for even more strength once the market deals with its latest investor complacency problem, which I will discuss later.

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Materials led all sectors of the S&P 500 last week with a 3.9% gain, as only utilities (-1%) finished the week with a loss. I have been pointing out scattered but consistent strength in the commodity space for much of this year, most recently in steel prices. In the July 5 Market Outlook I pointed out an emerging buying opportunity in the VanEck Vectors Steel ETF (NYSE: SLX), which has already gained 13.2% since July 5 and is well on its way to meeting my $33 upside target.  

This year’s strength in commodity prices is particularly important. Although it isn’t being discussed very much in the financial media, just a few short months ago one of the market’s biggest worries was global deflation and what it would do to equity prices. As long as the commodity space continues to improve, it bodes well for a much better second half for investors.

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Watch Out For A Late July Pullback

In the June 27 Market Outlook, I pointed out that the Volatility S&P 500 (VIX) index was showing an extreme in investor fear that has historically preceded U.S. stock market rallies. The S&P 500 bottomed the day of that report and has since spiked almost 9% higher through the end of last week.

However, now the opposite is true as the chart below shows the VIX has since collapsed near 12 to indicate an extreme in investor complacency, moving as low as 12.14 on Thursday before finishing the week at 12.67. The red highlights on the chart show that previous forays into this area have either coincided with or closely led recent peaks in the S&P 500.

A few weeks earlier than that, in the June 13 Market Outlook, I pointed out a low extreme in the CBOE Put/Call Ratio. This low extreme indicates that few put options were being purchased compared to call options, representing a lull in bearish sentiment and suggesting an upcoming decline in the stock market. As expected, the S&P 500 proceeded to decline by 79 points or 3.8% into the June 27 lows.

The next chart shows that another similar extreme emerged in this metric at the end of last week. Especially with a historically low VIX, this is even more reason for investors not to chase the market this week. Rather, investors should consider waiting for a better buying opportunity in the weeks ahead.

How To Tell A Simple Pullback From A Serious Problem

Now that I have pointed out two good reasons to expect a stock market pullback between now and month’s end, the next chart defines where the key levels are below the market in the S&P 500. The next important level is 2,135, which is 1.6% off last week’s all-time high. But the index could drop down to 2,060 before there’s any need for worry. 

As long as these levels are not significantly exceeded, I will consider the apparent upcoming decline to be corrective and countertrend in nature, and will view it as a potential new buying opportunity. It would take a breakdown below the 1,992 Brexit low to suggest that the market has changed its mind on direction, indicating a meaningful peak is in place at the recent highs.

Gold At A Decision Point

In the June 20 Market Outlook, I pointed out that commercial hedgers, the smart money in the gold business that use the futures market to hedge their physical gold holdings, were holding a large net short position in an aggressive bet that gold was overvalued. Although gold prices have risen a bit more since then, most of those gains were relinquished last week.

Meanwhile, the highlighted circle in the lower panel of the next chart shows that the total net assets invested in the SPDR Gold Shares (NYSE: GLD) have contracted back to their 21-day moving average as of Friday. This contraction indicates that GLD’s current trend of monthly expansion (shown by the green highlights) is becoming suspect.

As long as these assets remain above their moving average, I expect the current uptrend in GLD to continue as it has for most of this year. A sustained decline in assets below the moving average, however, would suggest that the hedgers were right and a decline in gold prices is underway. If that happens, the trend could trigger a larger and more sustained move lower.

Putting It All Together

Last week’s broad-based advance resulted in new all-time highs being set in both the Dow industrials and S&P 500, which clears the way for a much better second half. In the near term, however, the market’s huge spike higher from the Brexit lows has created a lot of investor complacency, which is historically bad for markets.

Amid these conditions, Market Outlook readers may consider waiting for a pullback later this month to buy the market rather than chasing the rally this week, as my intermediate-term bullish outlook will remain valid as long as the Brexit lows are not broken during a decline.