The S&P 500 gained 0.87% this week with Friday's close at 4,169.48.
The index traded poorly to start the week, falling to 4,071.38 on Tuesday and then trading down to our weekly low at 4,049.35 on Wednesday. Wednesday's close at 4,055.99 left us feeling like we got sacked in the backfield on 3rd and goal from the 3-yard line. It felt like "resistance" in the ~4,100-4,200 region held firm yet again.
But the price action most of 2023 has shown tremendous resilience, and the S&P 500 has dodged bullets well and has always found its way back on its feet even when grazed. So after trading down to a multi-week low on Wednesday, the index somehow found a ridiculous surge the remainder of the trading week.
The S&P 500 ripped 1.97% on Thursday, recovering all of Tuesday's and Wednesday's declines, and added another 0.83% on Friday. Collectively, the index gained 2.97% in a little more than two trading days from Wednesday's low through Friday's close.
We don't have a great reason or hypothesis as to "why" the S&P 500 took off to the races the last two trading days, but that's nothing new. Perhaps we can argue that the S&P 500 was buoyed higher by big-cap tech earnings from the likes of Microsoft (click here) and Meta Platforms (click here) coming in better than expected, and the technology and communication services sectors were indeed the top two performing sectors this past week, but who knows. The price of the S&P 500 has an uncanny ability to trade beyond the limits of imagination, meaning it's rare to truly know "why" the index does what it does.
So...where are we now? The answer depends on whether you think there's signal in the near 3% surge over the last two trading days.
All that said, there's a price thrust-like feeling given the surge higher the last two days where subjectively it feels like the index has now consolidated for long enough and it's ready to make a break to new year-to-date highs. If we've been stuck in traffic for the month of April, it feels like the last two days of the month found an open lane and slammed on the gas. We recognize that trading ranges are notoriously difficult to forecast, but we'd be surprised if the S&P 500 doesn't trade up to the ~4,200 marker over the week ahead, even if it then doesn't necessarily stay there.
The catalyst this week lies with the Federal Reserve's decision on interest rates and Fed Chair Powell's press conference.
Ironically, Powell made headlines this week too when we learned that somehow, someway, he fell victim to a prank call earlier this year that even the Jerky Boys would be proud of (click here).
For the week ahead, we firmly believe the Fed will raise interest rates another 0.25%, but that's where the press conference can be a catalyst to volatility. There's mounting evidence that would suggest this is the last rate hike of the Fed's tightening cycle, especially now with the issues at First Republic Bank (FRC, click here) providing further evidence that continued rate hikes will likely exacerbate the underlying stressors in the banking sector, meaning tightening credit conditions are here to stay.
We can't help but wonder if the market reaction to Powell speaking as if the "Fed pause" is here will be a "buy the rumor, sell the news" event. In other words, the S&P 500 may shoot higher to the ~4,200 level, but can it stay there? Will market participants, collectively, view the "Fed pause" as the Fed's own indictment against the state of the economy? Something like, "the Fed's pausing because there are serious problems on the horizon for the economy"?
While the federal funds futures market is complex by nature, we can't help but believe these participants are indeed pricing in serious problems on the horizon for the economy. Collectively, the federal funds futures market believes the Fed is going to be slashing interest rates over the coming year. Given Powell's tone at his last press conference, and given the tone from other Fed presidents and governors throughout April, we can't understand why the market believes the Fed will be slashing interest rates over the coming year unless we believe there are serious problems on the horizon for the economy. Therein lies the continued screaming match between the bond market and the stock market, with the latter seemingly pricing in a "soft landing" for the economy, and that's anything but a serious problem.
The Fed is expected to take the federal funds rate to 5.00-5.25% on Wednesday, only to then cut rates five times from November of 2023 through May of 2024, leaving the federal funds rate at 3.75%-4.00% one short year from now. This assumption has to believe the inflation story is dead, because if it isn't, it's hard to envision any interest rate cuts and the PCE report we got this week does seem to support the notion (click here).
Another catalyst for volatility over the week ahead remains the continued debt ceiling fiasco.
The yield curve continues to express some concern as to what's transpiring. The yield on a 1-month Treasury bill closed the week at 4.35%, while the yield on a 3-month Treasury bill closed at 5.10%. Further, the yield on a 10-year Treasury bond closed the week at 3.44%, meaning the yield on a 10-year Treasury bond less a 3-month Treasury bill is as inverted as we've ever seen. This is the bond market's way of saying the Fed needs to slash interest rates on the short end of the curve.
As for the week ahead, can the S&P 500 trade up to the ~4,200 region? If yes, can the S&P 500 then stay there? The S&P 500 hasn't had a problem roaring to the upside over the last year; it's had a problem sustaining strength after roaring to the upside. Higher prices have always brought eager sellers into the marketplace since 2022, and generally from the ~4,100-4,200 region. Therefore, if the S&P 500 can stay there this time, then perhaps a new cyclical "bull market" is indeed underway. And if the S&P 500 doesn't even get there this week, meaning we don't even trade up toward February's high, then color us surprised.
S&P 500 Primary Trend - Neutral, but...
The S&P 500 finished the month of April this week at 4,169.48. The index increased for the second consecutive month for just the second time since the start of 2022.
Ironically, the index closed April of 2022 at 4,131.93 and April of 2021 at 4,181.17. So we're slightly higher over the trailing 1 year, and slightly lower over the trailing 2 years. If there's a better way to articulate why the primary trend remains "neutral", please let us know.
You've all probably heard the phrase "sell in May and go away", but that speaks mostly to the weakness the S&P 500 demonstrates from June through October, not May 1 through October! According to Wayne Whaley (click here), the month of May has closed higher 21 of the last 30 years for average returns of 0.92%. Perhaps the S&P 500 can record its first three-month winning streak since 2021.
Now, there are some growing divergences that are a bit worrisome.
For example, the S&P 500's returns for April and the majority of its returns on a year-to-date basis are almost entirely attributed to the largest of market capitalization stocks. For example, the S&P 500 Equal Weight Index (SPXEW) only gained 0.24% in April and is only higher by 2.66% thus far in 2023. The Value Line Geometric Index (click here) actually fell -1.51% in April and is also only higher by 2.59% thus far in 2023. Semiconductor stocks fell -6.06% in April, and small-cap stocks fell -1.79%.
So it's obvious that the largest of market capitalization stocks have held the S&P 500 steady the last few months while the majority of the market has lagged behind, but that begs the question - will the majority of the market play catch-up, helping to fuel an upside breakout for the S&P 500, or will the largest of market capitalization stocks finally catch the laggards cold?
One way to analyze this is to take the ratio of the SPXEW to the S&P 500 itself (SPX). SPXEW has massively underperformed SPX over the trailing 14 weeks, so the ratio is "oversold" on the weekly chart. If we reference past "oversold" readings in the ratio chart below (as noted by the red highlighted circles), we can observe that they tend to mostly occur before corrective price action unfolds for the S&P 500.
We can also see breadth deterioration by analyzing the number of stocks within the S&P 500 closing the week above their 200-week simple moving average (200MA). In February there were 366 stocks within the S&P 500 that closed above their 200MA, but on Friday there were only 293.
Finally, the S&P 500 has bumped up against its 20-month simple moving average (20MA) twice now over the last few months. February's high, and now April's high (and close), were right on the 20MA. This is another way to track the pivotal nature of May's price action - either the S&P 500 will break out above the 20MA or it will find "resistance" after peaking above the 20MA. A make-or-break month of May is upon us!