For most of 2023, there has been an onslaught of bearish news calling for markets to drop. Investors have been blasted with a wall of worry from market pundits and news outlets calling for a recession, inflation, banking crisis, and most recently, the debt-ceiling drama. And while many are anticipating a recession to come, the U.S. financial markets have been climbing that wall of worry and rallying higher.
If you glance over the market news horizon, several market news outlets and pundits are now calling for a new bull market. Yes, by definition, this may be true. The S&P 500 did close out Friday with a +20% gain from its October lows in 2022. However, if you have been following our post, we called this back in October when our analytical algorithms and machine learning forecast saw a change in market movements. Below are links to our blog on October 14, 2022, and October 30, 2022.
Is a contrarian bounce coming?
The bears will let you know that an impending recession is still on the horizon. However, the bears cannot see the forest for the trees. The bearish narrative fails to see the improving high-frequency economic indicators and is determined to sit on data points that are becoming no longer valid. In either case, in our last blog, Signs Pointing to more upside, we presented the case using our analysis software that markets have a high probability of moving higher. And indeed, they have. As we stated on May 21, 2023:
"After consolidating for most of May, the S&P 500 had a breakout this week. The technical landscape is highly favorable for markets, and though we expect some consolidation to continue, the chance of financial markets moving higher is highly likely."
Financial markets that week did have a pullback after breaking through 4200 (resistance at that time). As we stated, we expected a minor consolidation and a move higher.
Big Picture
For most of the year, many called the rally off of the October low of 2022 a bear market rally. Now, the tune has changed, and news outlets are calling for the start of a bull market. Here is one such link - 'New bull market has legs.'
As mentioned above, we called for a strong counter-rally back in October 2022. This rally thus far has been led by the tech sector. If one wanted to point to a common theme within this rally, it would have to be artificial intelligence (AI). Other sectors, like semiconductors (which powers AI), have also benefited from AI-driven tech stocks.
The S&P 500 is on the cusp of challenging the ~4300 highs set back in August of 2022. Though the S&P 500 and Nasdaq show a market topping with technicals in the overbought territory, there is still room to move as FOMO starts to kick in.
Market Breadth
Market breadth internal readings have recently turned bullish. June started with the near-term and intermediate-term indicators crossing over to the bullish side. And as we see in the data points below, markets start pushing higher. A look at the indicator of stocks above\below their 200 EMA shows a trend of broader market strength. For most of 2022 and 2023, market breadth has been shallow, with only a handful of sectors sustaining the rally. This current set of data reflects a shift in that trend and a potential that more stocks are partaking in the rally.
Market Sentiment
Market sentiment has now kicked into FOMO (fear of missing out) mode. This has been evident in the recent push higher. That said, our market sentiment indicator does not stay this elevated for a prolonged period. Once levels get this high, there is typically an expected pullback. We can also see this on the MACD readings below. There is a potential for a pullback coming that may coincide with the test of the 4300 region.
Market Outlook
SPY made five consecutive weeks of positive gains, while QQQ (tech) narrowly made seven straight. With SPY trading in a narrow range for most of the week and QQQ hitting resistance, the Russel 2000 (IWM) is now having a breakout. If you recall from our last blog, we concluded with the following statement:
If IWM can get a weekly bullish signal and break through resistance, it can potentially lead markets in the coming months. With SPY and QQQ leading the current rally, it is only time for IWM to have a breakout. An IWM breakout would be a tailwind for the market as it will signal broader market strength, but it could also strengthen the rally that started in October 2022.
And subsequently enough, IWM got that breakout the same week we blogged about it.
SPY
SPY is in a clear rally. With the monthly and weekly buy signals intact, SPY has pushed higher to challenge the 431 regions. Below, you can see our ZigZag algorithm that clearly shows the high and low pattern that trends higher—a clear sign of a textbook rally.
QQQ
QQQ has been leading the charge. It has rallied to break through multiple resistance since receiving its monthly bullish buy signal on 1/3/23. Though it is getting into overbought territory, there is support in the 349 region. Resistance now sits at the 375 region.
IWM
IWM recently received its bullish buy signal on 5/22/23. And with that bullish signal, it was able to have a breakout this week. After breaking through resistance at ~181, it most likely will settle in as support. There is still a monthly bearish signal, but if IWM can consolidate and move higher, there is a high probability that we will see a monthly buy signal in the coming weeks.
VIX
Market volatility continues its descent this week. The VIX index has reached a level not seen since the pre-COVID days. On Friday, the VIX closed at 13.83, marking the lowest trading point since early January 2020.
Concluding
You may feel that you have missed the rally, with markets now up +20% since hitting their October lows. Possibly. The current rally has been textbook with rallies that break resistance and consolidate only to move higher. However, there are indications with BullGap's analytical and machine learning models that suggest a potential that a topping is in store. SPY and QQQ are starting to show this pattern. However, IWM looks like it could move higher in the coming weeks. This could be that rotation is occurring with investors, but either way, this is a strong impetus for the rest of the market. If IWM starts driving the market, this will provide equal balance, for now, heavy tech influence rally. It is still too early, and we are still waiting for the monthly buy signal from IWM. As an investor, we suggest patience if you miss the current rally. Markets right now have a look of a topping. Whether that is a minor pullback will define how markets behave for the remainder of this year.