As we approach the middle of the year, there are positive indications that the S&P 500 Index (SPX) may experience a technical breakout above the February and May 2023 highs.
Today's late-day rally is due to several positive news headlines, including strong corporate earnings, economic data, and potential progress in the debt-ceiling debate. The news has boosted investor confidence in resolving the US debt ceiling. Furthermore, mid-May unemployment figures have decreased, indicating consumer strength.
While earnings from many retailers remain mixed, Walmart (WMT) exceeded expectations today, a good sign for overall consumer strength. The Fed funds futures now predict a 35.6% probability of a 0.25 bps hike in the upcoming Federal Open Market Committee (FOMC) meeting.
As we near summer, investors wonder if they should expect the usual seasonal patterns of the Sell in May and Go Away trading phenomenon or if there will be another Summer Rally before the onset of market weakness during the early-fall weak seasonality period.
According to the Stock Traders Almanac, the stock market has produced average summer rallies of 13% since the 1800s. If this trend continues, stocks may experience higher prices into June, July, and August before the weak seasonality periods of September/October sets in.
The S&P 500 Index (SPX) has shown bullish indications since the October 2022 bottom, including the Jan 2022 downtrend breakout (Jan 2023), golden cross buy signal (Feb 2023), higher lows, and two constructive technical basing efforts.
Recent price actions may lead to a technical breakout and the beginning of the summer rally. However, the challenge for SPX is to convincingly surge above the key initial resistance at 4,186.92-4,195.44, coinciding with the Feb and May 2023 highs. A decisive breakout confirms the start of the summer rally.
In the event of a breakout, SPX can rally to 4,325.5 (+3.03% gains) or close to critical intermediate-term resistance at 4,312-4,325, coinciding with the 61.8% retracement from Jan-Oct 2022 decline and the 8/16/23 reaction high.
A higher-high pattern above 4,325.28 solidifies an intermediate-term trend reversal, extending the summer rally to 4,582 (breakout target and 9.15% gains).
On the downside, initial support lies at 4,048-4,078.5, the 3/31/23 near-term breakout, Apr/May 2023 lows, and the 50-day ma. Additional secondary support lies near the pivotal 200-day ma at 3,975.5. The Dec 2022 uptrend (3,842) and the Dec 2022/Mar 2023 higher lows at 3,764.5-3,809 are crucial intermediate-term support.
While there are encouraging signs of a potential summer rally, limited market participation and the dominance of a small number of stocks, if sustained, can trigger another stock market selloff into late summer to early fall.