The S&P 500 hit new record highs on Wednesday. Although it's a headline we normally like to read, even the most euphoric of bulls is likely getting a little tired of reading it... especially without any clear context behind the strength. While we'd never dismiss the importance of the "stocks are going higher because they're going higher" mindset, we don't get the feeling anybody out there is completely comfortable with how long this rally has lasted without once being tested. In fact, despite Wednesday's advance, there's a certain hesitation we can't quite put our finger on that could indicate this leg of the rally has almost fully run its course. Advertisement Your MarketClub Trial Has Been Paid For What's better than access to powerful, proven trading tools? Easy, someone else paying for you to use them! MarketClub is proud to announce a close partner has stepped up to cover the trial costs for a limited number of new MarketClub subscribers. You'll have a full two weeks to check the Trade Triangle entry and exit signals, scan for new markets to trade with Smart Scan, and get a feel for the Email Alerts to see if they will fit into your trading strategy. Start Your MarketClub Trial - Cost Covered Advertisement I'm not even going to pretend what you're about to read is my observation. John Monroe over at the SmallCap Network Elite Opportunity deserves the full credit, since he and his team are the ones who did the legwork and performed the analysis. In a nutshell, the EO's people have set very specific ceilings for both the S&P 500 and the NASDAQ 100 now that both have punched through prior resistance levels. I can't give you the specific number, but I can tell you the most likely ceilings for the market from here aren't too much above where we peaked today. Yet, those target levels are also above what most would consider the obvious ceilings. This is an idea we've not discussed much before, mainly because it's just a little too messy to hash out in one newsletter. At this point in time, though, we really need to have the conversation. Here goes. You know how big round numbers tend to be seen as major floors and ceilings for the market's major indices? We've talked about the psychological importance of the S&P 500's 2000 level for a while, and you've also probably heard all the chatter about what the Dow Jones might do once it bumped into the 17,000 level. Some of that ceiling discussion even came from us. Yeah, well, even though we've talked about big round numbers in a theoretical sense, it's a little naive to think a major index is going to hit a peak (or a bottom) at an exact milestone value that ends in two or three zeros. These lines - while psychologically important - are still just a basic framework where the odds should be reweighed. If we fall a little short of, or trade a little above, a key line in the sand, it's not because the premise failed. Even that, however, isn't your entire take-away for today. What's also rarely seen and appreciated about an index's major milestones is how the market can use them to cause confusion and anguish, yanking people out of stocks at the wrong time, or pulling them into the market at the wrong time. How does it do that? By pushing an index just far enough beyond a big round number to make traders think the breakout or the breakdown is going to keep going, and then WHAM! The reversal takes hold just when most people were beginning to think it wouldn't. That's my long-winded way of saying neither I nor John Monroe expect the S&P 500 to peak exactly at 2000 now that the 1985 level has been bullishly broken. Most likely, the S&P 500 will tiptoe just a little beyond 2000, lure in the last of traders who don't want to miss out on any more gains, and then pull the rug out from underneath the market. I can't give you the precise number John Monroe named as his peak target for the S&P 500 and the NASDAQ 100 in today's Elite Opportunity newsletter, though I will say he used a very logical and rational extension analysis to peg those levels. They make perfect sense to me anyway, as does his theory about all the major indices painting a bullish picture by pushing past one more key ceiling and then seeing it all come unraveled. As he voiced it, "...when you consider we're now only XYZ [specifics removed] points away from the top end of our longer-term target on the S&P 500, it's important to continue to ask one's self just how much upside is left before we see some sort of significant retracement." I completely agree with him, and while we intend to talk to you more about the market's valuation woes later on this week, I wanted to whet your appetite today with some numbers. First and foremost, Q2's numbers for the S&P 500 have been stronger than expected. At the beginning of earnings season we were looking for about 10.5% year-over-year improvement. With about 20% of the S&P 500's companies having reported in, though, the index is on pace to post about a 12.4% improvement in second-quarter earnings. That's solid. The outlooks have gotten better too. As of the latest look, the S&P 500 should see a 14% increase in earnings for Q3, a 14.7% improvement in income for Q4, and a 16.6% increase in earnings for Q1 of next year. After that the growth pace is projected to slow. Still, what's wrong with better-then-expected earnings growth? Not a thing, but there is something wrong when the market's rally has outpaced earnings growth the way it has over the past several months. As it stands right now [assuming the S&P 500 ends up posting the currently-expected earnings of $29.64 for the second quarter], the S&P 500 is valued at a trailing P/E of 17.7 and a forward-looking P/E of 15.5. Both are higher than average, and the trailing P/E is downright frothy. Even the forward-looking P/E ratio of 15.5 is oddly stronger than the normal forward-looking P/E of around 14.0 though. I have to believe the valuation conundrum is at least part of what John Monroe was talking about when he was suggesting there just wasn't a lot more upside left for the market to tap into here. Again, we'll talk more about valuations later in the week. Wednesday's point is, while today's break to a higher high could be a little catalytic, we're not looking for any kind of significant rally from here. The S&P 500 would do well to wiggle its way beyond 2000, and if it does, we'll be looking for - and expecting - a pullback. For the NASDAQ 100 the key line is 4000. Today's bullish jolt might spark a move just a tad above the 4000 mark, but if we should break that ceiling and traders start to pile back into stocks as a result, it would be the perfect setup for a more significant corrective move. It certainly jives with the idea that the market usually throws at you what's least expected. Oh, and by the way, we only scratched the surface of John Monroe's analysis for Elite Opportunity members in today's newsletter. If you want some mind-blowing outlooks and market analysis - not to mention great stock picks - every trading day, you have to become a subscriber, or at least take a two-week test drive. The EO is the best I've ever seen at handicapping the market and explaining how you can best make money in it. Here's how, or cut and paste this link: https://www.smallcapnetwork.com/?vmpd_ckstr[click_track]=Newsletter&vmpd_ckstr_redirect=/pages/SCNEO/v1/