“Bullish momentum remains intact for the S&P 500 and Nasdaq, but near-term overbought conditions coupled with deteriorating breadth make equities vulnerable to a pullback or correction,’ said Craig Johnson at Piper Sandler.”
- Bloomberg, June 19, 2024
To be fair, the quote above does not fully capture the sell-side strategist sentiment in recent weeks.
Multiple strategists have revised prior forecasts for the S&P 500 Index (SPX – 5,464.62) higher by the end of this year.
The revisions are seemingly with reservation, or not as optimistic as headlines might suggest. For example, Evercore’s strategist said last week that the SPX could go up to 6,000 before plunging, but maintained his 4,750 year-end target because he sees investors in a bubble/mania mentality.
And since mid-May, multiple strategists have ramped up their year-end targets for the SPX. In fact, strategists’ average SPX year-end target now stands at 5,297, below Friday’s close, but above the 4,800 average strategist target coming into this year.
The headlines might imply increasing strategists’ optimism, since targets have been revised higher, but keep in mind that they are less bullish at present relative to the beginning of the year.
In mid-December, the average year-end SPX target was 4,800, when the SPX was seesawing between 4,700 and 4,800 into yearend 2023. The forecast implied strategists were expecting a flattish market in 2024. Now, even though forecasts have been revised higher, the average target would imply a slight pullback into year end 2024.
A lot has been made about big-cap technology driving the SPX gains and breadth weakening during the latest run to new highs. I don’t dispute that Nvidia (NVDA) and other large-cap tech stocks like Netflix (NFLX), Micron Technology (MU), and Meta Platforms (META) have heavily influenced the SPX’s overall performance in 2024.
But there are stocks outside the technology area that have risen impressively too in 2024, such as Eli Lilly (LLY), General Electric (GE), General Motors (GM), Chipotle (CMG), Moderna (MRNA), Walmart (WMT), Costco (COST) and Progressive (PGR). In fact, these stocks have each more than doubled the SPX’s year-to-date return. They are less influential not due to price action, but because their respective market capitalizations are lower.
As of Friday afternoon, around 125 of the index’s 500 members were beating the index this year, which means the breadth of the rally is not outstanding, but it's not as dismal as some may have you believe.
The above are observations for you to keep in mind as you review the graph below: an apparent increase in strategist optimism as the SPX climbs -- but not really -- and a rally somewhat built on momentum from only a few names.
In other words, this rally is not accompanied by major euphoria at the strategist level. It is an advance heavily led and influenced by large-cap technology names, but other stocks from different sectors and lower market capitalization levels are also chipping in, and this should not be ignored.
“The SPX’s advancing 30-day moving average, which I have discussed in prior commentaries given its significance since late last year, is a moving support level as time passes. It comes into the week at 5,291 and is rising approximately 13 points. It could be around 5,340 by week’s end, which is coincidentally the site of the May intraday high.”
- Monday Morning Outlook, June 17,2024
In reviewing key levels to monitor in the week ahead, the May high at 5,340 continues to be a level of potential support. The important 30-day moving average enters the week just below it at 5,331 and is projected to be at 5,385 by the week’s end, based on its current slope. This means it will become the first level of defense beginning Tuesday.
I found last week’s high at 5,508 interesting because this level is exactly 20% above the July 2023 closing peak. This closing high is important, as it preceded a correction that lasted well into October. As such, anyone that bought the early December breakout above the July 2023 high may have been in profit-taking mode. While there was resistance here last week, when an index is making all-time highs, there is not a lot of overhead resistance to talk about from a chart perspective.
The options market may produce resistance in the way of heavy call open interest (OI) impeding creating hesitation points at certain strikes. There was a small call wall at the 5,500-strike on SPX options that just expired this past Friday, and that may have had something to do with Friday’s close below 5,500, too.
Regarding option activity, I continue to see thar short-term option players have a bias toward SPDR S&P 500 ETF Trust (SPY – 544.51) put options relative to call options when looking at five-day open interest changes on the nearest Friday expiration options.
This suggests that as the market carves out new highs, short-term speculators continue to bet on a reversal lower from which they can profit. Betting against strength has mostly been a losing game since the trough in late October. This activity also suggests that there isn’t a “sky's the limit” mentality that might be evident at a major top, indicating pullbacks to support should be bought. However, if you see a change in this group’s opinion of where the stock market is headed coincident with a technical breakdown, be prepared for a corrective move.
Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.
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