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The second half of the year

June end on Friday, June 30th, also signaling the close to the second quarter and the first half of the year. Next week marks the start of the next quarter, month, and second half.

The street consensus calls for stocks to be weak during the first half, followed by a rally into year-end. Stocks have surprised the consensus forecast, rallying sharply during the first half. It is a welcome reprieve from losses from last year.

Although plenty of potential bad news can still hurt investors in the second half. The tightening process can also tilt the economy into a double-dip recession. Inflation has subsided but remains stubbornly above the 2% target. The ongoing crisis in the regional banking industry can lead to a credit crunch. Geopolitical uncertainties in the Russia-Ukraine and China-US trade wars can impact commodities and global economic growth.

Although many investors remain on edge, waiting for the next shoe to drop, the stock market and the economy have been resilient. Consumer spending and labor markets remain relatively healthy despite a recession that may or may not arrive this year.

The SPX Index and other market indexes bottomed seven months ago in mid-October 2022. At this stage of the rally, one would expect broader market participation. SPX, COMPQ, and NDX have outperformed their peers this year. But they have been driven by a handful of mega-cap technology stocks.

Nonetheless, SPX Index has broken out above 4,325.28, surpassing its Aug 2022 reaction highs and confirming a higher-high pattern. The technical action reaffirms the Jan 2022 downtrend reversal and the resumption of the primary uptrend.

Historically, the transition period between the last rate hike and the first rate cut tends to be favorable for stocks. The current investment environment suggests market participants may have already discounted two more fed hikes of quarter-points each.

It will become clearer in the next two Fed FOMCs meetings as the ending of the tightening cycles will force sideline money to return to the stock market, prompting lagging markets and sectors to break out.

While many investors wait for more clarity on the direction of monetary policy, timing and severity of the recession (if any), the inflation rate, and the outcome of geopolitical conditions, we remind investors to respect the dominant and longer-term trends in the stock market. Always invest in securities with favorable intermediate-to-long-term uptrends and be disciplined in protecting positions during market downturns.

Enclosed are heat maps of the 1-month performances of S&P sectors and stocks from a market-cap and equal-weight perspectives.

From a market-weight perspective, it is clear that mega-cap technology-related stocks continue to dominate the marketplace.

Surprisingly, the SPX/sector performances from an equal-weight basis show dramatic improvements in the S&P Industrial (XLI) and Cyclicals (XLY) sectors.

If Technology (XLK), Communication Services (XLC), and other S&P sectors continue to emerge to take over leadership roles and if XLI and XLY retain their strengths during the second half of the year, this would greatly expand the market breadth and reignite the May 2013 structural bull.

Source: Chart courtesy of (SPX market-cap weight)

Source: Chart courtesy of (SPX equal weight)

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