Fresh 14-month Highs

Fed paused interest rate hikes last week, and the recent favorable economic numbers, including the 0.3% rise in May’s retail sales month-over-month spending from the Commerce Department, lifted stocks this month.

The question remains – what is behind the recent rally, and can it sustain?

The 14-month high is hurting the Bears, short sellers, and sideline traders as they avoided the stock market due to stock overvaluations, fears of aggressive Fed rate hikes, uncertainties in interest rates, economic conditions, and geopolitical concerns.

US stock market indexes closed at their highest levels since April 2022 as investors continue to cheer the recent Fed pause action. The Bulls and momentum-based traders show no signs of stopping. The SPX Index has recently crossed into a bull market (20% gains from October 2022 low), quietly exiting from its cyclical bear decline. The benchmark index was in a bear market for 248 days before ending its cycle last week.

While the gains have been impressive, the broad-based large-cap index has been and continues to be driven by a few select winners, including the mega-cap Technology based names and AI-focused companies.

A large amount of short selling in the stock market can best explain part of the October 2022 bull rally. There is over $1 trillion in short interest, or the shares sold short and not yet covered in the S&P 500 Index. The figure equates to around 5% of all shares traded in the US stock market.

Short sellers, hedge funds, and institutional investors have underperformed the stock market. Broad-based SPX index has gained around 15% for 2023, suggesting the short-sellers have approximately $120 billion in losses for the year, possibly leading to recent short-covering.

Momentum traders and investors appear to be toe-stepping back into the stock market as the Nasdaq Composite Index, Nasdaq 100 Index, growth, small-cap, and mid-cap indexes show signs of bottoming and reversing their primary downtrends.

Stock market and stock market returns are not always driven by reality. Investment behavior and perception can collectively influence the stock market and returns.

There is no denying inflation, higher interests, and inflation can create problems from the consumer and producer perspectives. It is also important to realize that longer-term trends override intermediate-to-shorter-term trends.

The structural trend of SPX Index remains in a structural bull trend since breaking out of its previous long-term sideways trading range in May 2013. It would imply that January-October 2022 is a cyclical bear decline within a longer-term structural bull trend.

The recent breakouts above 4,195.44 (5/30/23), 4,311.69 (61.8% retracement from Jan-Oct 2022 decline on 6/9/23), and 4,325.28 (6/12/23) are technically constructive developments, further confirming the end to the cyclical bear decline and the start of the next bull market.

So, the next pertinent question becomes – how high can SPX rally before consolidating its gains?

Although higher SPX levels are possible, an overbought condition is developing into the recent rally. Technical indicators, including price momentum (MACD) and overbought/oversold (RSI), are trading at overbought levels.

The following are SPX resistances, with bolds representing formidable resistance zones:

Resistance 1 = 4,534.63-4,545.85 (Sept 2021 high and 76.4% retracement from Jan-Oct 2022 decline)

Resistance 2 = 4,595.31-4,637.30 (May 2023 ascending triangle breakout above 4,195.44 target and the Feb/Mar 2022 highs)

Resistance 3 = 4,743.83 (Nov 2021 high)

Resistance 4 = 4,818.62 (1/4/22 all-time high)

Resistance 5 = 5,158.98 (1-year triangle breakout above 4,325.28 price projection)

The following are SPX supports, with bolds representing formidable support levels:

Support 1 = 4,325.28 (6/12/23 breakout and 8/16/22 previous reaction high)

Support 2 = 4,186.5-4,195.44 (5/26/23 breakout and 50-day ma)

Support 3 = 4,035-4,048 (Apr/May 2022 lows and Oct 2022 uptrend)

Support 4 = 3,986.5 (200-day ma)

Support 5 = 3,809-3,868 (Mar 2023 higher low and Dec 2022 uptrend)

Support 6 = 3,764.5 (Dec 2022 higher low)

Source: Chart courtesy of StockCharts.com