A couple weeks ago in More Rate Hikes?, I observed
“The S&P is knocking on a widely watched glass ceiling around 4200. If it convincingly breaks through, traders will take it as an all-clear and run with it.”
This has come to pass. There remain a number of crosscurrents. The yield curve remains steeply inverted, although as we’ve also observed before, it becomes a more timely indicator when it begins to uninvert. The Fed is making noises about a potential pause or “skip” in rate hikes, a possible scenario being stepping back to 25 bp every other meeting, effectively halving the pace of increases. Prior step downs in this cycle have led to stock market rallies. Market breadth has been exceptionally skinny, as observed in Anorexia Nervosa, but is binging on fast food today, as the Dow Jones 30 and the Russell 2000 both leave the NASDAQ 100 in the dust and the rally reverberates around the world.
In the very short term, seasonality is bullish. As Norm Fosback described in his 1975 classic Stock Market Logic, price increases tend to be concentrated in the first few trading days of each month. This may be due in part to many monthly paydays falling at the beginning of the month. On an even shorter time frame, Fridays have a bullish bias as traders don’t like to be short over the weekend. Regardless of origin, however, the decisive penetration of S&P 4200 is short term bullish, sending it rapidly hurdling towards the next century mark. Although there is no rational basis to believe this number has any magical significance, it has been widely cited in the financial media and has served as a ceiling for the S&P for several weeks. That this breakout might be taken by traders as a “buy” signal isn’t much of a stretch.
Looking out further, the picture is less clear. The case for a “June swoon” also incorporates seasonality … why else would you want to Sell in May? Markets are overbought on AI giddiness and the resolution of the debt ceiling. Another widely cited factor is a giant sucking sound of liquidity as Treasury rebuilds its cash cushion with issuance potentially approaching the trillion dollar mark. On the other hand, investors in the aggregate finding themselves with an increased Treasury allocation may try to rebalance by buying stocks. As discussed in How Monetary Policy Affects Asset Prices, this phenomenon can only “work” through rising stock market cap.
All things considered, it could be several weeks before we see another meaningful selloff in stock prices.