The AI infused 2023 first half rally seemed impossible to stop.  As the price momentum kept pumping stock market valuation to new heights, the fundamental bears were forced to concede bearish calls.  The most adamant bear Morgan Stanley Michael Wilson apologized for his wrong-way bet in a note to Morgan Stanley clients on July 24.  Wilson underestimated the price momentum powered by AI and lowering inflation.  Because the October 2022 to July 2023 rally retraced more than half of the 2022 correction, technically the rally can no longer be labeled as a bear market rally.  However, the rally from the October 2022 low is still a late cycle rally, not a start of an early bull cycle.  That’s why the defensive mega tech stocks were the leaders in this late cycle rally.  The risk appetite is not the same as an early bull cycle.  An early bull cycle needs an easy monetary policy, not a tight monetary condition with tight credit conditions like what we have now.

The street celebrated the July Fed hike on July 26 as the possible final interest hike on July 27 morning, the market immediately reared its ugly head by selling hard from that gap.  The July 27 intraday trading was a top reversal pattern.  It is a typical sell the news behavior since the July Fed rate hike has been such an anticipated event.  With the top in place, unbeknownst to everyone, the credit agency Fitch came out on August 01 downgrading the U.S. credit rating.  Fitch cited the reason of higher interest expense for the US government and an “erosion of governance”, specifically pointing to recent efforts by conservatives to prevent the U.S. from raising its debt ceiling. The credit downgrade led to a small decline in stock and bond markets.  On August 9, the credit agency Moody’s downgraded 10 small to mid-sized banks and warned possible cuts to other banks.  This downgrade put the banking issues to the forefront again.  The market can no longer ignore the risks and keep the rally going.

Since the S&P 500 topped on July 27, a day after the July Fed rate hike, there have been two major fundamental catalysts confounding the stock and bond markets.  The Fed Jackson Hole meeting will be held on August 24-26.  Between now and August 24-26, the market could be in some kind of suspense trading sideways.

Technically, the S&P 500 July 27 high could be the 2023 seasonal high as the market is entering a choppy summer season.  The NASDAQ topped on July 19 and has successfully confirmed a double top setup.  The top distribution pattern in NASDAQ is very clear.  The DOW topped on August 1.  This is very understandable.  The NASDAQ had the most gain during this rally, therefore it is the first to top.

In order to nullify the S&P 500 July 27 top, the market needs to take it out with volume.  With all the uncertain fundamental developments and the seasonal pattern, we believe that the likelihood of the S&P 500 July high being the 2023 seasonal top is high.  If it indeed this is the seasonal top in 2023, the next seasonal low location is October 2023, or February-March 2024.  It really depends on how the market behaves at the bottom location.

The NASDAQ is 13.55% over its 200-day moving average and the S&P 500 is 8.76% over its 200-day moving average.  If the market corrects to their 200-day moving average, it will be a healthy pull back.  That is our current expectations right now anticipating the 200-day moving average to provide support.

The AI and infrastructure boom will power the next bull cycle.  Palantir stock made a high on August 1 after it was called the “Messi of AI” by a Wedbush analyst.  The individual stock analysts normally are terrible with market cycles and always upgrade stocks at the top.  This upgrade proves to be a top call as well.  During PLTR earnings call, the company announced $1 billion stock buyback and anticipated the stock to be included in S&P 500 index by the third quarter 2023.  We continue to hold our core positions with PLTR and sell covered calls during the correction time.  PLTR will be subject to the general market correction.  So it’s best to wait at the general seasonal low location to add shares.  It’s impressive that PLTR topped after the NASDAQ index that showed extra strength in the individual stock.  Probably it will be a cult stock like TSLA in the future because of a charismatic CEO and not taken seriously by the street but taken very seriously by the retail investors.

Below is the NASDAQ daily chart.

You can see that the double top is confirmed and it is in a clean distribution pattern.  Short term, it is oversold.  It could bounce for the next few days (not more than 3-5 days) before it falls again.  50-day moving average has been violated, the next stop is 200-day moving average around 12000.