On a high note, markets hit this Thursday, 6/20/24, with the S&P 500 just eclipsing the 5500 marker. The Nasdaq index also pushed higher, almost exceeding the 20000 marker for the high that day. With only a week left on the trading session for June, the near-term technicals are highly overbought and could use a breather. Is a pullback necessary to relieve the current market dynamics?
As we noted a month back in our last blog about the market pushing higher - "The S&P 500 is now looking straight up with no apparent resistance. There is still a high probability of a minor pullback or consolidation as near-term technical readings are overbought. However, the uptrend is intact."
The S&P 500 was just under the 5420 resistance region at that time. It has since blown through that and has a chance to continue its upward trend.
Big Picture
The S&P 500 has continued its ascent to newer highs, with weekly candle bars making higher lows and higher closes (indicative of a strong bullish rally). Resistance is now the immediate support at the 5420 region. After hitting a high on Thursday, markets did have a reversal that looks to continue in the short term. Any significant downside is well protected by support.
Market Breadth
Let's just put it this way. Market breadth has been abysmal for most of the year. Looking at the chart of the intermediate channel (25% stocks up and down quarterly), it started its decline at the start of 2024 and has since treaded between a neutral and bearish reading. Our readings show that most stocks not in the S&P 500 that are positive have a marginal upside of 1 to 3% YTD. While the S&P 500 has gained +13% this year, more than 30% of its components are down. IWM is almost negative for the year, with more than 50% of its constituents down.
Market breadth does not look like it is reversing to the bullish side anytime soon.
Market Sentiment
FOMO. FOMO. FOMO. That has been the name of the game for the past couple of months. Without hesitation, investors have piled onto the Magnificent 7 (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla). The AI rally that began last year has purely been driven by emotion and not so much economics. Feds are not expected to cut rates until possibly September, and inflation has not dropped to the Fed's 2% target. Nvidia and the AI bullish sentiment have propelled this rally.
Markt Outlook
Markets continue to rally to new highs this week, and though the near-term technical readings suggest a minor pullback or consolidation, the larger time frames are quite bullish. Let's look at the current market setup from a higher timeframe. Instead of looking at the daily, let's see if the weekly trend is still intact.
SPY
SPY's weekly trend is bullish. It is still within its monthly bullish buy signal and has been increasing since hitting its weekly buy signal on 5/6/24. It did close the week right on support near the 544 region.
QQQ
Like SPY, QQQ's weekly trend is very bullish. It also occurs within the context of its monthly buy signal and has rallied higher since receiving its weekly buy signal on 5/6/24. There is nothing bearish about this chart.
IWM
IWM is clearly bearish. Its weekly sell signal was triggered on 6/3/24 and has been trending lower. Resistance is now at the 201 region. There is also a potential for a more alarming signal, where the monthly sell signal may trigger. IWM will need to break through resistance by the end of next week to avoid this sell signal.
Concluding
With the S&P 500 and Nasdaq hitting highs this week, there is a high probability that markets will consolidate near support at the 5440 to 5420 region. However, the weekly and monthly bullish trends are intact, and we expect markets to continue their upward push to newer highs. We are approaching a market where everyone is exuberant and becoming complacent. Though the technical readings are highly favorable and bull rallies can generally keep technical readings highly overextended, a pullback would allow markets to relieve the technical overbought conditions and continue higher. The potential for this becomes higher as we approach into late July or August as our core analytical algorithms are already turning bearish.