May 23, 2023
The S&P 500 (SPX) has extended to the upper end of technical pattern resistance near 4200 with thin leadership in mega cap Tech and Comm Services. Thin leadership typically occurs at the end of a cycle and the preference to own the largest stocks is a defensive, flight to quality move. The stage that follows a flight to quality is usually a flight to cash. The recent advance to current levels has also occurred with decelerating momentum and the past two sessions have triggered divergence signals that typically precede a reversal. From a pure technical perspective, the tradeoff between risk and reward looks terrible. Macro fundamentals look equally challenging with Fed funds 2x higher than the neutral rate, global central banks tightening, the dollar lifting off lows and China activity data rapidly decelerating. Ultimately, we expect the SPX will follow US data, specifically weekly jobless claims. Weekly claims sustaining levels above 260,000 will likely be the macro trigger to send the market lower. We continue to believe a retest of the October low near 3550 is in the cards, which implies ~15% downside from current levels.
Clarity: The debt ceiling is the maximum amount of debt the government can lawfully issue. Reaching the ceiling means the government has spent more than Congress has allowed. To be clear, less fiscal spending is preferred during periods of elevated inflation. A government shutdown occurs when the government runs out of the lawful authority to spend. This debate will occur in September.