The stock market rallied hard last week when both sides promised no default, yet without any details. The S&P 500 briefly took out hard resistance at 4200 but it was promptly rejected due to the uncertainty connected with debt ceiling fight. The primary force in this rally is from the AI hype. The NASDAQ 100 took out its August 2022 high, which looks as if the bear market is completely over and a new bull market is in the making.
The Fed Chair spoke last Friday and he was pretty dovish, hinting a pause is likely in June Fed meeting. The market sold off when the news about Republicans walking out negotiation meeting last Friday morning hit the wire. All three indices created an intraday sell signal, but the close was not as negative as it could be, meaning the selling hasn’t even started, but it did make a posture that the S&P 500 at 4200 is a hard resistance.
President Biden just got back from G-7 meeting and is supposed to meet with the House speaker on Monday. The Republicans wanted to control spending, while the Democrats wanted to spend as much as they can. So the gap is huge and it is getting closer to the x-date June 1, 2023. If this is a re-play of 2011 debt ceiling crisis, the stock market will start to selloff until the debt ceiling is lifted. From July 10 to August 21, 2011, the US large cap lost 17% and the small cap lost 24%.
Cyclically speaking, all three indices are nine weeks into the current weekly cycle. The March 17 2023 low was a weekly cycle low. If the market starts to sell off hard here and this weekly cycle can be called a bearish cycle (too soon to turn down) and the selloff can last all the way into August. Perhaps even make a double bottom in October 2023 to conclude the seasonal cycle that started in October 2022.
But volatility has been very low lately, and the swings have been lackluster with an upside bias due the craze with AI. Many big hedge funds whales have come out with bullish stands on AI and they believed inflation problems will be solved as AI taking hold of the economy. The stock market is truly at a crossroad. Is the NASDAQ leading the market going up or the DOW leading the market down?
Considering the present high interest rate and a weakening economy, the stock market should go down. But if the debt ceiling is lifted and the Fed pauses in June, the stock market has all the reasons to rally too. The financial market cycle is different than the business cycle. The financial market cycle is driven by liquidity and the business cycle is driven by fundamentals. There are lots of money on the sideline. So if the market goes up against a weakening economy, it would not surprise us. Typically a rate hiking pause rally lasts for about 9-12 months, from the time of rate pause to the first rate cut.
The deadline for lifting the debt ceiling is June 1, 2023. Can’t underestimate the politicians stupidity. They could back themselves into a corner and miss the deadline to cause a default. No one is expecting a default, it doesn’t matter how impossible it seems right now. So really the likelihood of a stock market summer rally is much greater than a crash.
There will be violent swings around the debt ceiling negotiation in the coming week. We are slightly bullish and believe those debt ceiling swings are buying opportunities.
Our AI pick PLTR had a great run recently. It literally doubled in 11 trading days. It is now overbought in short term. Perhaps during the debt ceiling volatile swings PLTR will try to test the breakout price at 10.41. In other words, the market wants to shake you a little bit and push the price down to 10.41 or even lower to invalidate the breakout. The breakout will be valid if the market continues the summer rally.
Below is the S&P 500 weekly chart. It is 9 weeks into the current weekly cycle. It could sell hard from here to make a weekly cycle low in August. Or it could rally slowly from here to make a top in August. It really depends on the debt ceiling outcome. It is an earthquake if the US indeed defaults for the first time in history.