Beware the ‘June Swoon’ for stocks as AI-ebullience leaves tech overbought

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The new month has gotten off to a decent start for stocks, with the S&P 500?SPX,?+0.99% ?once again poking above the 4,200 level.

Futures suggest it may extend gains Friday after chances of an imminent U.S. default were finally removed.

But whether 4,200 can now morph from ceiling to support may depend on how traders ultimately discount how Friday’s mixed jobs data will impact Federal Reserve thinking on interest rates.

Unfortunately, even that may not be enough to help the rally continue, reckons Adam Turnquist, chief technical strategist for LPL Financial.

Technical and seasonal factors mean investors should focus on the potential for a “June Swoon,” he said in a note published midweek.

While a debt-ceiling deal in Washington could be a catalyst for the S&P 500 to break significantly above 4,200, the overbought conditions in the technology sector and mega-caps — the primary drivers of this year’s advance — may make it hard for the market to consolidate above that hurdle in the near term, especially without a broader participation of stocks, says Turnquist.

The tech sector’s relative strength index, a momentum gauge, shows just how overbought it is, alongside about 25% of tech stocks, Turnquist notes.

To emphasize this, the second from top chart in the graphic below shows how the ratio of the tech sector relative to the S&P 500 is in rarified territory.

“While overbought conditions provide validation of the sector’s uptrend, and overbought does not mean over, odds for a shorter-term consolidation and/or pullback appear to be growing,” says Turnquist.

And while people like to repeat the mantra ‘Sell in May and go away’, it’s actually June that historically has provided poor returns during the late spring/summer. The S&P 500 has delivered average and median gains during June of 0.0% and 0.1% respectively. It’s the fourth worst performing month since 1950.

Turnquist adds: “While the overall average June return is underwhelming, when the S&P 500 does trade higher during the month, the average return has been 2.5%. In contrast, when the S&P 500 trades lower during the month, the average June return has historically been -3.0%.”

Unfortunately the seasonal set-up for tech is even worse, with the sector generating since 1990 average and median returns of 0.0% and minus 1.7% respectively. That’s the second worst month, with positive returns only 42.4% of the time, according to Turnquist.

Still, Turnquist finishes on a more positive note: “The good news is that if there is mean reversion, it would likely be toward the sector’s uptrend and provide a potential pullback opportunity for investors seeking a better entry point into tech. The LPL Research Strategic and Tactical Asset Allocation Committee maintains a neutral recommendation on the technology sector and is waiting for a better entry point.”

Markets

Following some choppiness after the jobs data, U.S. stock index futures?ES00,?0.45% ?YM00,?0.55% ?NQ00,?0.26% ?are firmer and benchmark Treasury yields?TMUBMUSD10Y,?3.644% ?are nudging higher as a risk-on mood prevails. The dollar index?DXY,?0.13% ?is little changed, with oil?CL.1,?2.27% ?higher and gold?GC00,?-0.42% ?lower.

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