Outlook for week of June 20-23

Stocks have experienced a somewhat volatile Friday session, but overall, it has been a highly positive week for the bulls, with the S&P 500 registering a gain of 2.8%. The reaction in the market following Wednesday's Federal Open Market Committee (FOMC) meeting suggests that investors are either skeptical that the Federal Reserve will be as aggressive as initially suggested or confident that the economy, along with corporate earnings, can withstand a couple more 25 basis-point (bp) interest rate hikes. The recent upward movement in prices, driven by either a fear of missing out (FOMO) or momentum (MOMO), is undeniable and cannot be easily disregarded.

The earnings season for the first quarter has essentially concluded, and the rates of beating earnings per share (EPS) expectations (78%) and revenue expectations (67%) have reached their highest levels in the past four quarters. Analysts may have been overly cautious about corporate earnings earlier in the year, which is understandable given the prevalent concerns about a possible recession within the investment community. However, looking ahead to next week, there are still a few notable companies scheduled to report their results:

On Tuesday, the 20th of the month, we have FDX and LZB reporting. On Wednesday, the 21st of the month, PDCO, WGO, KBH, and SCS will be reporting. On Thursday, the 22nd of the month, CAN, DRI, CMC, GMS, and SWBI are scheduled to report. Finally, on Friday, the 23rd of the month, KMX and APOG will be reporting their earnings.

The S&P 500 has been consistently reaching new 52-week highs, indicating an upward trend. The recent breakout above the resistance level of 4,200 is commendable for the bullish market participants. However, in the short term, the Relative Strength Index (RSI) is signaling overbought conditions with a high reading of around 77. Historically, when the RSI was similarly elevated in September 2nd, a correction of approximately 10% occurred over three weeks. While it is not certain that history will repeat itself, it is important to respect the possibility of a correction. The RSI does not provide an exact timing for a correction but serves as an indicator of its potential approach.

Although the NDX (Nasdaq 100) may be relatively stable at the moment, it has surged by an impressive 17% since May 4th. Similar to the S&P 500, the RSI for the NDX is also running high, currently at 78. The last time the NDX had such a high RSI reading was in November 2021, when the index was trading at all-time highs. Additionally, there seems to be a negative divergence in the Moving Average Convergence Divergence (MACD), suggesting a weakening momentum. While this does not guarantee an imminent correction, it implies that we may be approaching one. It is worth noting that an "overbought" RSI reading can correct either by going down or moving sideways. Therefore, the NDX could experience a choppy sideways movement to consolidate the recent gains.

Bloomberg's rate hike probabilities indicate a 71% likelihood of a 25 basis point hike in July, which has increased by approximately 10 percentage points in the past two days. This suggests that the market anticipates one more rate hike by the Federal Reserve before they conclude their tightening cycle. However, the Fed's decision is data-dependent, and although inflation has shown signs of deceleration, it remains above the Fed's target.

While stocks have been riding the momentum wave in June, the near-term technical indicators indicate that the bullish trend may need to take a pause soon. The market has seen a modest decline with profit-taking observed ahead of a three-day weekend. From a bullish perspective, inflation is decreasing, and intermediate and long-term technicals support a positive outlook. However, from a bearish standpoint, stocks are fully valued, the possibility of a recession cannot be disregarded, and there are indications of overbought conditions and the need for a consolidation phase. Timing a consolidation move is challenging, and although the recent bullish momentum is acknowledged, the stretched sentiment and technical indicators towards the upside cannot be ignored. Therefore, the outlook for the following week is expected to be volatile and moderately bearish. While stocks may continue their upward trajectory, there is a sense that mean-reversion may be approaching.

Here is a preview of the upcoming schedule for next week:

Monday (19th): NAHB Housing Market Index

Tuesday (20th): Building Permits, Housing Starts

Wednesday (21st): EIA Crude Oil Inventories, MBA Mortgage Applications Index

Thursday (22nd): Continuing Claims, Current Account Balance, EIA Natural Gas Inventories, Existing Home Sales, Initial Jobless Claims, Leading Indicators Index

Friday (23rd): IHS Markit Manufacturing PMI (Preliminary), IHS Market Services PMI (Preliminary)

Past week:

The regular Q1 earnings season has concluded, with three S&P 500 companies reporting their Q1 earnings this week, three of which exceeded the consensus EPS expectations. Overall, all 498 (100%) companies in the S&P 500 have reported their Q1 results. Comparing the beat rates to previous quarters, the Q1 earnings showed a year-over-year growth of -2.7% compared to the estimated -6.6% when the quarter ended. Q1 revenues, on the other hand, had a year-over-year growth of +4.2% compared to the estimated +1.9% at the end of Q1. This contrasts with the final growth rates of -2.9% and +5.6% for earnings and revenues, respectively, in Q4.

Looking at the performance of the market sectors in 2023 year-to-date (YTD) compared to the full-year performance of 2022, it is evident that there is a noticeable cyclical bias. The information technology sector has shown the strongest performance, with a YTD growth of +34.3% compared to a significant decline of -28.9% in 2022. Similarly, the communication services and consumer discretionary sectors have seen substantial YTD gains of +33.1% and +24.7%, respectively, after experiencing considerable declines in 2022. In contrast, the defensive sectors, such as consumer staples, utilities, and energy, have faced challenges in 2023 YTD, with negative growth rates ranging from -2.0% to -7.1%. It is worth noting that the energy sector, which had a remarkable +59.0% growth in 2022, has experienced a downturn this year.

Last week's outlook proved accurate as the recent renewed optimism continued in the market.?The S&P 500 (SPX) showed a 0.3% gain through Thursday, June 8, and another 0.3% increase as of Friday, June 9. The beginning of a new bull market was established on October 12, 2022, with the SPX closing at 4,292.44, surpassing the threshold after four failed attempts. While the SPX still has a significant distance to reach a new all-time high of 4,796 (+11.7%), it is currently well above its major moving averages. In order for this new bull market to end, the SPX would need to experience a full 20% decline, which is the typical definition of a bear market. However, the SPX will remain in a bull market until it closes below 3,435.14 (-20%). The comparison to other post-World War II bear markets reveals that although this recent bear market was longer than the previous one in early 2020, it was the fifth shortest overall (282 days) and the weakest (-25.4%) since 1966.

In terms of regulatory developments, the Securities and Exchange Commission (SEC) has filed a formal complaint against Binance, its subsidiaries, and CEO Changpeng Zhao (CZ). The SEC alleges numerous violations, including the disregard of federal securities laws, enrichment at the expense of investors' assets, solicitation of U.S. investors through unregistered platforms, unregistered offers and sales of crypto asset securities, fraudulently misrepresenting surveillance and controls, and unlawfully offering securities and market functions without SEC registration. On June 8, the SEC filed an emergency order to freeze the assets of Binance.us and require the repatriation of customer-held assets. Binance.us has subsequently announced the suspension of U.S. dollar deposits and the imminent inability for users to withdraw dollars from the exchange. These developments further suggest the possibility of Binance considering a complete closure of its U.S. operations. Coinbase, the largest U.S.-based crypto platform, also faced an SEC complaint, alleging intentional evasion of regulations, trading of unregistered securities, operation of unregistered services and exchanges, and depriving investors of necessary protections. The lack of regulations in the digital asset category and the recent regulatory crackdown highlight the inherent risks associated with owning and trading cryptocurrencies. Those who wish to continue owning digital assets may consider holding them in "cold storage" to maintain control and accessibility.

The interest rate on the 10-year U.S. treasury, represented by $TNX, had a fluctuating week. It started at approximately 3.76%, experienced an increase mid-week, and then declined towards the end of the week.

Over the past eight years, whenever the probability of a rate hike or cut has exceeded 65% before a Federal Reserve (Fed) meeting, a corresponding rate adjustment has typically occurred. The probability reached 85% the day before the last rate hike on May 3, 2023. Despite the limited impact of economic reports this week, fed funds futures still indicate a 30% chance (down from 35% last week) of a +0.25% hike on the upcoming meeting on Wednesday, June 14. Additionally, there is a 53% chance (up from 50% last week) of a rate hike on July 26. Therefore, if no hike takes place in June, the cumulative probability for July is currently estimated to be around 83%.

Despite experiencing a 4% gain in the last two weeks and the confirmation of a new bull market, the current indicators suggest that this trader optimism is expected to persist for at least another week.

While some analysts continue to predict a recession in 2023, now that the bear market has ended, there might be expectations of a market correction. However, based on the indicators, it is unlikely to occur in the upcoming week.

The release of the May Consumer Price Index (CPI) is scheduled for Tuesday, June 13, which coincides with the conclusion of the Federal Open Market Committee (FOMC) meeting where a potential rate hike could be announced. However, unless the CPI report significantly exceeds expectations, it is not likely to impact the Fed's decision.?Looking at the upgrades and downgrades this week, there have been few changes, indicating that the consensus among indicators remains moderately bullish for the next week.

Upcoming Economic Reports:

Monday, June 12:

• Treasury Budget for May: This report tracks year-to-year changes in tax receipts and outlays. While it typically doesn't elicit much market reaction outside of April, when most taxes are collected, it provides insights into government finances.

Tuesday, June 13:

• Consumer Price Index (CPI) for May: The CPI measures changes in the average price level of a fixed basket of goods and services, indicating inflation or deflation relative to the base year of 1984.

Wednesday, June 14:

• Producer Price Index (PPI) for May: The PPI measures inflation at the wholesale or manufacturing level, reflecting price changes for goods before they reach consumers.
• FOMC Rate Decision: This regular meeting of the Federal Open Market Committee announces any interest rate changes. It is often followed by a press conference with the Chairman of the Federal Reserve.

Thursday, June 15:

• Retail Sales for May: This report provides an important gauge of consumer sentiment and spending patterns, offering insights into consumer behavior.
• Initial Jobless Claims: This report indicates the number of individuals filing for unemployment benefits for the week ending June 3, 2023. It helps track the health of the job market.

Thursday, June 15 (contd.):

• International Trade (Import & Export Prices) for May: These reports monitor the prices of goods bought in the U.S. but produced abroad and the prices of goods sold abroad but produced in the U.S. Price changes are influenced by factors such as inflation and currency exchange rates.
• Industrial Production & Capacity Utilization for May: Industrial production measures the output of various industries as a percentage relative to output in 2007. Capacity utilization measures the percentage of output potential compared to actual output in 2007.

Friday, June 16:

• Business Inventories for April: This report examines the inventory levels of goods held by producers or acquired for resale. It is a lagging indicator since the components have already been released.
• University of Michigan Consumer Sentiment for June (Preliminary): This report, released around the midpoint of the month, collects data on consumer attitudes and expectations, aiming to predict discretionary spending. It provides insights into consumer sentiment.Iut