The 10-year treasury yield fell below 4.0% and the DOW decisively bounced off its 50-day moving average last week. The good inflation data saved the day! The DOW successfully prevented a double top confirmation, therefore the S&P 500 and NASDAQ were able to press higher last week. The big banks earnings were not horrible and the consumer spending is slowing, but still strong though. The most anticipated recession hasn’t arrived and the stock market has every reason to be bullish.
However, the S&P 500 has already gained 17% in the first half 2023. Will the S&P 500 repeat the same gain in the second half of 2023? Most likely not. It is likely for the S&P 500 to enter a period of sideways summer trading during the Q2 earnings season to work off the overbought condition. And perhaps a 5-10% correction will come in October. If we do get a correction in October, then a year end rally is highly possible.
The gist of the unrelenting rally is liquidity. The Fed infused a large dose of liquidity into the banking system to stem the regional banking crisis in March. That money got into the financial systems and therefore the equities market benefited. Since March 2023, the stock market has had the necessary three ingredients for a bull market: earnings (not great, but not as bad as feared), liquidity (the Fed pumped money to save the regional banks) and sentiment (sentiment changed from 2022 due to short covering and recession was pushed further out). All three indices so far have retraced more than 62% of 2022 correction, which raised the possibility of a higher high in 2024 to conclude the current 4-year cycle.
AI is real and an AI led bull market is going to happen sooner or later. Also the Inflation Reduction Act of 2022 will cause a domestic building boom in the next 10 years. With these two secular bull market drivers, everyone is anxious to finish the final flush of the current 4-year cycle and to start a real bull cycle. With this backdrop, we wouldn’t be surprised to see a V-shaped bottom in the final 4-year cycle low.
While we frequently look at the big pictures, we also pay attentions to the day to day trading as we do trade in short term signals. We apologize if we sometimes pay too much attention to short term trades. Big gains are made by holding long term. The key is to hold the right kind of stock.
Technically, the S&P 500 is 17 weeks into the weekly cycle that started on 03/17/2023. The lack of correction at the weekly cycle high location indicates either a cycle inversion or a new weekly cycle has occurred. The strength of the bull market distorted the weekly cycle. The S&P 500 4534 level is an important 78.6% retracement. The S&P 500 could be lingering around 4530 as the resistance for the summer lull. In other words, the S&P 500 probably is at the upper limit of the summer high. But there is no immediate catalyst to push the market down. Therefore we have to wait until the summer sideways trading is over.