Since May, the S&P 500 (SPY) has basically been range-bound, trading between 2,750 and 3,000. In recent months, this range has tightened with prices stuck between 2,850 and 3,000 amid a pattern of lower highs and higher lows.

In June and July, the S&P 500 was able to make new all-time highs, vaulting past May's high of 2,950. The index hit an ultimate high of 3,029 in July before giving up the bulk of its gains. In recent days, the S&P 500 has rallied to just under 1% of these highs. This article will consider the likelihood of stocks reversing from these levels like in September or May or whether prices will continue to move higher.

Strong Stock Market Breadth

One way of measuring the strength of the market is by looking at breadth which measures the participation of stocks. For example, the cumulative NYSE Advance/Decline is computed by adding the total number of advancing stocks minus declining stocks. Often, breadth and price trade together, however sometimes, they can diverge and offer meaningful opportunities.

Currently, there is a clear divergence. While, the stock market is stuck under its all-time highs. Breadth has already broken out to new highs and looks particularly strong.

The strength in breadth indicates that under the surface, money is moving into stocks on an individual level. In contrast, price could be making new highs while breadth lags. This would be less bullish and indicate that money is being concentrated into the large-cap stocks, while smaller stocks are seeing negative flows. This circumstance would require traders and investors to be more cautious and risk-averse.

Domestic Economy Strengthening

Another unique aspect of this test of the recent highs is that cyclical stocks linked to the domestic economy are making new highs and leading the market higher. This is evident in the charts of homebuilders, trucking companies, construction, and retail stocks. In effect, the stock market's strength is being affirmed by economic data and crucial components.

Contrast this to previous highs when stocks were led by defensive sectors, REITs, and utilities whose gains were largely due to the plunge in interest rates. Essentially, gains in those stocks were due to lower interest rates making their dividends more attractive on a relative basis. This is not exactly the catalyst for a multi-month bull market rally.

Poor Sentiment

Surprisingly despite the S&P 500's 20% gain for the year and its proximity to all-time highs, there is a notable lack of enthusiasm around stocks. This is also evident in the CFTC chart below showing positioning in speculative futures vs defensive futures:

Despite, stocks being at lofty levels, there is no sign of excess froth. Sentiment has recovered from outright bearish levels to neutral, but it remains far from a level, where everyone is invested. There is a ton of money in short positions and on the sidelines that could become forced buyers, if stocks do break out to new highs.