Last month on June 2023, SPX Index rallied 20% from its October 2022 low, moving decisively into the bull market territory after spending eight (8) months in a cyclical bear decline. The stock market recovery overcame many risks, including a regional banking crisis, repeated interest rate hikes, and geopolitical uncertainties.
The recent surge in interest rates amidst stronger-than-expected economic numbers has many on Main and Wall Street fearing that this rally is not sustainable. The structural bull rally that started on May 2013 feels like this is one of the most-hated bull markets in recent memories.
History shows investors tend to love bull markets when they participate and hate them when they are not actively involved.
Currently, investors continue to fear the following issues:
1. Earnings season begins this week, and market pundits warn of hidden weakness in second-quarter corporate earnings. Estimates show companies in the SPX Index can report earnings declines of over 7% for the second quarter. It would mark the third consecutive year-over-year decline. Companies may be losing corporate pricing power and struggling to raise prices amid higher financing costs.
2. Worries about higher interest rates and persistent inflation can lead to another global credit or financial crisis. A shot across the bow warning first came last fall, sparking the turmoil in U.K. and currency markets. The second warning occurred with the collapse of a U.S. regional bank, Silicon Valley Bank, and recently higher interests have hurt leveraged commercial real estate companies and stocks that carry large debt loads and high debt-service costs.
3. Concerns are building that institutional investors returned to the stock market because of FOMO. The crowded positioning in the mega-cap technology stocks, specifically the eight (8) technology SPX names (i.e., AAPL, MSFT, GOOGL, AMZN, NVDA, META, TSLA, and NFLX), can suddenly magnify stock market declines if these professional investors simultaneously exit these positions.
4. The lack of market breadth and broadness of domestic and international rallies do not bode well for the sustainability of the current stock market rallies. As mentioned, the eight mega-cap technology names account for 30% of the overall SPX market cap weighting. Without the participation of these eight stocks, SPX, COMPQ, NDX, and other stock markets would not be nearly as strong as they may appear. Also, U.S. small-caps (SML) and mid-caps (MID) continue to struggle to catch up with their larger counterparts. In addition, stock markets outside the U.S. also lag, evidenced by underperformances from MSCI EAFE Index, MSCI Emerging Markets, Shanghai Composite Index, and other international indexes this year.
5. The U.S. Yield Curve inversion over the past 1-year hints at an economic slowdown. The inversion of the 10-year US Treasury yield below the 2-year yield or the widest gap since the 1980s warns of recession fears. A persistent and sustainable yield curve inversion suggests growth is slowing despite the recent resilient economic data.
The stock market will continue to ponder the above issues. However, on a near-term basis, investors will turn their attention toward the economic data beginning with the Consumer Price Index on Wednesday, July 12th, followed by the release of second-quarter corporate earnings, with large banks (i.e., JPM, WFC, and C) reporting toward the end of the week. The next Fed FOMC meeting will become increasingly important as the street consensus views another Fed hike of 25bps in the July 26th meeting.
Although this may be the most hated bull market and market volatility will continue into the second half, the SPX Index has successfully broken out of key resistances, reaffirming the next bull market. The favorable technical developments support the basis for further SPX gains this year:
(1) Jan 2022 primary downtrend breakout above 4,060 (1/26/23).
(2) Breakout above 4,195.44 (5/26/23).
(3) Breakout above the 61.8% retracement from Jan-Oct 2022 decline at 4,311.60 (6/12/23).
(4) Breakout above 4,325.28 (6/12/23).
(5) Higher lows (3,491.58 - 10/13/22, 3,808.86 - 3/13/23, and 4,082 - current) and higher highs (now at 4,490) reaffirms primary uptrend.
(6) Golden cross buy signal on 2/1/23 as the 50-day ma (4,257.92) crossed above the 200-day ma (4,015.33), reaffirming a primary uptrend.
(7) Mar 2023 uptrend channel between 4,293 and 4,538 suggests a short-term uptrend.
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