This article presents some key points in favor of the S&P 500 Index breaking out above the 4200 level. For almost 12 months now, the index has been trading in a narrow wedge between 4200 and approximately 3800. The question on everyone’s mind is when this will end. The simple answer to that, for the time being, is that we are still stuck in this range. For a trader, however, this is paradise while for a long-term investor, it proves to be frustrating.
The monthly candle chart for the S&P 500 Index indicates that sentiment is still shaky despite a nice breakout above trendline. There are some positive and negative points to consider:
1) On the positive side, prices have remained above the 50MA since the Covid Crash. A major turn around would be a monthly close above the 20MA at 4167, which is almost there. If the close this month of May is above 4167, it would be considered outright bullish.
2) The 20MA (orange line) and 50MA (yellow) are converging, which is likely to result in more tight ranges in the immediate future.
3) On the negative side, the macro backdrop shows potentially more small bank failures, debt limit negotiations, and ongoing inflation. In 2023, there have been more than several bank failures, rate hikes, sticky inflation, a bomb accidentally landed in Poland, intense international tensions between China and Taiwan, and yet the S&P 500 Index continues to make higher lows through each event. Seems like the market continues to be in a “buy the dip” mood.
This is a classic wedge setup on the S&P 500 Index that has already broken out and successfully backtested the trendline breakout just a day ago and has held it. The macro-bearish, doom-and-gloom, world-is-ending thesis is beginning to fade into the background.
As Nvidia just raised their guidance by a full $3B for the next year and enjoyed a 30% rise in share price since its earnings, it seems like the Dow Theory is playing out in front of us. This is the first time in the history of Dow Theory that a Phase 3 dip was barely any lower (Oct 2022 lows) vs June 2002 lows.
Key Takeaways:
1. A risk-on approach makes sense here. If you’re a long-term investor, consider dollar-cost averaging profitable names, i.e., names that you believe have a solid product and future. Personally, my top picks are AMD and KO.
2. Crying wolf regarding the macro-bear thesis is a modern-day shakespearean travesty. Inflation is moderating, and real estate is still investable. Powell is not going to hike to kingdom come as some would wish, and JPM is not going under. The more net shorts in the market, the harder the squeeze above 4200.
3. The market’s success often lies in certain industries’ concentration of market influence in certain stocks, such as technology. These companies typically drive innovation, create jobs, and contribute to economic development FOR the future!
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