The S&P 500 was unchanged this week with Friday's close at 5,460.48, a decline of just -0.08%.
The index traded as low as 5,446.56 on Tuesday and as high as 5,523.64 on Friday for a weekly range of just 1.42%. It was a quiet week of trading, but the price action on Friday supported the idea we discussed in last week's Update - "resistance" is forming in the ~5,500-5,600 region.
The S&P 500 traded up to 5,523.64 during Friday's session, a new all-time high, but closed Friday back down at 5,460.48, a decline of -1.14%. Last week, the first trip above the 5,500 level only lasted a matter of minutes. Interestingly, this week's trip above the 5,500 level managed to last only an hour. As we wrote last week, the minute the S&P 500 trades above 5,500 there's hesitation and skittishness across the actions of market participants, who, collectively, have been more eager to sell than buy the S&P 500's underlying constituents and derivatives tied to the S&P 500.
Importantly, the hesitation above the 5,500 level is coming across like a "buyers' strike", it's not as if the highest prices in the history of the index has left any large and scary red bars on the chart as of now (i.e., the S&P 500 isn't selling off massively following trips above the 5,500 level).
It's presenting itself as a degree of exhaustion on the buy side, meaning there just isn't strong enough demand to jolt the S&P 500 higher after the index crosses the 5,500 level. Given "overbought" conditions, and the rally we've had since April's low, a buyers' strike is normal, natural, and more than reasonable. Heck, large and scary red bars would be reasonable too, albeit more concerning. Regardless, we continue to operate under the assumption that the ~5,500-5,600 region will hold as "resistance" in the near term, and therefore the S&P 500 is once again in need of some form of a "break".
From a technical perspective we don't think the index needs to experience a material price decline, or even a textbook "correction" - instead we're looking more for a period of price consolidation.
Economic data was mostly positive this week. The Fed's preferred measure of inflation, the core PCE index, came in as expected (click here). Personal income was a beat while consumer spending figures were a slight miss. Nike (NKE) had its worst trading day in its storied history as a public company (click here). Chicago PMI surged (click here) and consumer sentiment came in better than expected (click here). First quarter GDP data came in as expected and continues to support the "soft landing" narrative (click here). The debate was a total debacle on Thursday night, but that didn't seem to have much market impact on Friday (futures were up nicely as the debate was unfolding, so that was a bit curious).
Interest rates took a leg higher this week with the yield on a 10-year United States Treasury bond (UST10Y) rising 14 basis points with Friday's close at 4.40%.
This is a roundabout way of saying bond prices traded lower this week - as an example, the iShares 20+ Year Treasury Bond Index Fund (TLT) fell -2.32% this week. Bonds got absolutely obliterated in 2022, hence why interest rates returned, and there is still uncertainty about whether or not a lasting bottom is in. This will obviously be a derivative of how the inflation and economic growth stories unfold into the future, but it is surprising that the S&P 500 is trading at and around the ~5,500 level with UST10Y at 4.4%.
We are absolutely of the opinion that all roads lead to lower interest rates.
In other words, if inflation data plays ball sooner rather than later then the Fed will kick off the "Fed pivot" and begin to lower interest rates, with most forecasts expecting the federal funds rate to eventually settle in the ~3% range. It's in this scenario where we believe that both stocks and bonds will continue to perform well in the near term.
In the scenario where inflation data doesn't play ball, where the Fed either can't "pivot", or even worse the Fed has to raise interest rates one or two more times, then that will be a hard negative for forward-looking economic activity and all but guarantee a recession. It's in that scenario where the eventual recession will lead the Fed to eventually slash interest rates, which is why we believe all roads ultimately lead to lower interest rates. The problem is this scenario is a miserable ride, it's like being stuck on the 5 in Fair traffic, meaning if inflation doesn't play ball over the coming months then we think both stocks and bonds will experience a volatility event and probably trade lower by -10% to -20%.
Circling over to market internals, breadth continues to be an ominous sign.
The S&P 500 closed Friday comfortably above its 50-day simple moving average (50MA), but there are only 244 stocks within the S&P 500 that finished the week above their 50MA. The army is advancing, but with fewer and fewer troops! Historically, these types of disagreements can lead to bouts of material volatility as the army eventually succumbs to its lack of numbers. However, the saying is "price is king", not "breadth is king", so the price action in the S&P 500 remains innocent until proven guilty.
As for the week ahead, we turn the calendar to July! The first half of the year saw the S&P 500 gain a massive 14.48% and the second half of the year kicks off with a bang. It's a holiday-shortened week, but we have a ton of market-moving economic data reports coming forward and Fedspeak all week long. Fed Chair Powell is scheduled to speak on Tuesday and we'll get the jobs report on Friday. So, the ingredients are there for a big week, one way or the other. We doubt we'll use the word "unchanged" in next week's Update!
S&P 500 Primary Trend - Up
The S&P 500 closed the month of June this week. June's monthly close is a new all-time high monthly close.
The S&P 500 has now increased two months in a row, rising by 8.44% in the process. The index has now increased five of the first six months of 2024, finished the first half of the year higher by more than 10%, and closed the first half of the year at the highest price in the history of the index. How's that for a bullish trifecta?
We continue to label the primary trend as up, or "bullish".
During uptrends, investors are best served maintaining their target equity allocation across their portfolios' asset allocation and relying mostly on passive investment strategies. The objective during uptrends is to "make hay while the sun shines" and the sun is still shining as of Friday's close. The sun won't shine forever, which is why it's vital your portfolio makes progress during the time periods it's actually shining.
It's not until the primary trend is labeled as down or "bearish" that investors need to change their tactics.
Finally, here's your first half of 2024 scorecard, courtesy of Finviz! The big winner so far in 2024 is cocoa prices, which are up an astounding 174%. Orange juice and coffee prices are also up more than 20% thus far in 2024, so if you're a chocolate and coffee lover your monthly credit card bill might also be in a primary uptrend!
Steve & Rick
