The S&P 500's push through 2,000 signals further gains ahead as the market rides positive momentum, but traders are also keeping a cautious eye on the bond market, which may be signaling something totally different.
On the back of solid corporate earnings growth and new optimism for the economy, the S&P 500 has quickly progressed to 2,000 from 1,900, reached for the first time in May. The big round 2,000 level on the S&P is a key psychological level and is more than 1,300 points above where the market bottomed in March 2009.
"Call it somewhere between a milestone and an achievement," said Jack Ablin, CIO of BMO Private Bank. "I think it will boost investor confidence to some degree. Psychologically, it's important to get new numbers, but it has been propelled by a combination of liquidity and fundamentals."
Asset class performance since major market milestones (%)
| Click to edit | Since 1000 | Since 1500 | Since 1900 | Since 1909* | Last week |
|---|---|---|---|---|---|
| Years since | 13.57 | 7.32 | 0.26 | 0.05 | 0.02 |
| S&P 500 | 99.67 | 33.07 | 5.19 | 4.69 | 1.39 |
| Cons. Discretionary | 205.64 | 75.68 | 5.88 | 5.37 | 1.72 |
| Cons. Staples | 111.64 | 64.91 | 2.07 | 3.71 | 0.68 |
| Energy | 293.63 | 42.34 | 3.13 | 2.39 | 0.9 |
| Financials | 9.77 | -37.74 | 5.9 | 5.25 | 2.16 |
| Health Care | 159.47 | 73.38 | 7.67 | 6 | 1.65 |
| Industrials | 117.52 | 35.2 | 1.43 | 5.4 | 1.15 |
| Technology | 134.71 | 76.24 | 9.1 | 5.18 | 1.58 |
| Telecoms | -18.93 | -6.47 | -0.39 | 1.44 | 0.49 |
| Utilities | 50.74 | 0.96 | 2.14 | 4.69 | 1.86 |
| Materials | 118.26 | 30.89 | 3.62 | 3.15 | 0.18 |
| Dow Transports | 151.45 | 63.97 | 5.84 | 5.77 | 0.56 |
| Russell 2000 | 169.22 | 41.1 | 3.85 | 4.45 | 0.96 |
| S&P 400 Midcap | 329.33 | 61.12 | 4.52 | 4.85 | 1.35 |
| Gold | 321.97 | 86.63 | -1.11 | -2.56 | -1.57 |
| WTI Crude | 445.69 | 47.32 | -10.73 | -4.3 | -3.38 |
| CRB Commodities | 22.72 | -7.46 | -6.4 | -1.56 | 0.11 |
| Long Bond Future | 15.65 | 26.22 | 2.72 | 1.01 | 0.36 |
| US Dollar Index | -17.72 | 0.67 | 2.62 | 1.19 | 1.13 |
| Ten Year Yield ** | -3.16 | -2.28 | -0.14 | -0.02 | 0 |
Source: Source: Bespoke *Most recent local market bottom 8/7/14 **Change, not % change
But analysts also note that the bond market is flashing a mixed message that stock traders may want to heed. The short end of the curve has been seeing rates rise, as if in anticipation of Fed rate hikes next year, but the long end of the curve is hugging lower levels and the 10-year is trading with a yield below 2.4 percent.
"The bond market is responding to two different audiences," said Adrian Miller, director of fixed income strategy at GMP Securities. "But I think the dominant audience is really the fixed-income participants that have questioned growth dynamics globally as well as the bond market being subject to a continued yield reach."
Treasurys have drawn in investors as yields in Europe go to record lows, including negative yields on the short end in Belgium, following a 0.93 percent yield on the 10-year bund and negative short term rates in Germany.
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"The big question is who is right? The fixed-income markets generally are more right than the equity market," said Miller. German yields have moved lower on concerns about growth in Europe, and in Germany, the key engine for the euro zone economy. Miller said the divergence is a warning for both the stock market and the short end of the curve.
But stock strategists see the market as fueled by liquidity, thanks to the Fed's zero rate policy and quantitative easing program. That bond-buying program is scheduled to wind down this fall but the Fed is not expected to move on rates until the middle of next year.
"We've come along way over the last five or six years, when we were all worried whether the financial system was going to make it through. Thanks to the Fed and thanks to the growing economy and profits, I think it's reversed itself," Ablin said.
The U.S. economy has increasingly contrasted the euro zone economy after a first reading of 4 percent second-quarter U.S. growth. GDP actually contracted slightly in Germany.
Some analysts also question the trek to 2,000 because it has been on light volume, in what could be one of the lightest trading weeks of the year.
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"It's a good, round number," said Jim Paulsen, chief investment strategist at Wells Capital Management. Paulsen said he thinks the number could be tested but the S&P may take a run to 2,050 or so before backing down.
"I really think we have to get to after Labor Day, get the players back and see where we're at," he said. "I think it's low volume. I've been expecting 2,000 and breakout all year, but I still think we're close to the highs of the year."
Paulsen said his concern is that the market could "melt up."
"It's kind of nirvana here. If we're growing at 3.5 percent, and there's no inflation or interest rate consequences, that's a melt up," he said. Paulsen expects the market to end the year flat.
MacNeil Curry, global head of technical strategy at Bank of America Merrill Lynch said the market could see another leg up, and the advanced/decline line has been showing strong breadth.
"Round handles tend to act as support and resistance just because people tend to anchor off of big round numbers," he said. "The fact we're pushing through it is another indication the trend is healthy. We would probably see a push up to the 2,020-2,035 area. We wouldn't expect any real volume because it's the time of the year when no one is around."
On the positive side, the stock market continues to rise while it remains unloved despite the gains.
"The underlying, long-term sentiment is still very cautious. People are much more worried about protecting the downside than accentuating the upside. As long as that's the case, it's likely the buy-on-the-dips strategy will continue to work," said Richard Bernstein, CEO of Richard Bernstein Capital Management.
—By CNBC's Patti Domm.