In light of the realization that the US cannot afford the cost of default, it comes as no surprise that the market did not react as dramatically as it did in 2011, when the S&P 500 experienced a decline of approximately 19.4%. Instead, throughout May 2023, the S&P 500 consolidated within the range of 4048-4231 and finally broke out in early June once the debt ceiling negotiations were successfully concluded. The market has become even more bullish with the release of the employment report, which shows that the US economy is proving resilient with 339,000 jobs created in May, surpassing Wall Street’s estimate of 195,000. These positive indicators suggest that a hard landing is not imminent, although some, like Mike Wilson, still believe that a sharp dip (3200-3500) may occur at a later time.
As mentioned in our previous newsletter, sentiment often acts as a perfect contrarian indicator: the more pessimistic the gurus are, the more bullish the market tends to be. The S&P 500 tested and found support around its 50-day moving average (50MA) at 4048 in early May, and subsequently broke out above its resistance level at 4195 on June 2nd. It is possible for the index to reach its next resistance level around 4325, as the uptrend momentum remains strong. Although the index is entering overbought territory, it has not reached extreme levels at this moment. However, it is important to note that the recent uptrend has been driven primarily by a few key large-cap stocks (#META, #NVDA, #MSFT, #AAPL, and #TSLA). If these five stocks were excluded from the S&P 500, the index would have only seen a modest 3% increase for the year. Additionally, the involvement of AI in the market has contributed to the performance of certain stocks, providing a secular growth story in a time when overall economic growth is expected to remain weak. However, a real bull market may only be triggered once broader capitulation occurs, propelling the market into its next stage.
In the current market environment, where only a few movers dictate profitability, it is not easy to make profits. However, it is crucial to remember that buying opportunities often arise when the time comes to make a purchase, despite the challenges presented by market conditions.