It was another strong week for the major indices, which were supported by generally broad-based buying interest. Mega-cap stocks led the way again as every S&P 500 sector finished higher. The best-performing sectors were the health care (+2.2%), consumer staples (+1.4%), and communication services (+1.3%) sectors. The relative laggards were the energy (+0.3%), utilities (+0.6%), and information technology (+0.6%) sectors Tech sector leader NVIDIA‘s had a rough end to the week on some possible negative fundamental news out of China, but its soft finish did not derail the broader market on Wednesday or Friday. Although there was some continued thought by many traders that the stock market is overbought and due for a pullback, the possible fear of missing out on further gains appeared to be supporting the indices, along with the continued belief that the Fed is done raising rates.
Year-to-date the S&P 500 is up 15.9%, and the Nasdaq Composite is up 30.8%. Those are big relative moves but are even stronger when measured from the lows registered in October 2022. From there, the S&P 500 has surged 27.6% and the Nasdaq Composite has soared 35.9%.
However, when the major stock indices move too far, too fast, they will normally experience a period of consolidation to work off some of the shorter-term excesses. This process might already be underway right now for the stock market, a normal digestive process.
Where it is today, though, isn’t as important as where it is going. And where might that be? Obviously, I can’t know for certain. Nobody does. However, it may be unlikely to go much higher from here without some pause pullback/retesting or at least consolidation.
A strong run from this level won’t be easy given the fundamental headwinds posed by elevated interest rates, stretched valuations, China’s economic challenges, and the slow-moving storm that is the lag effect of prior rate hikes from the Fed.
To be fair, the stock market might not go much lower from here either, especially if earnings estimates hold up, the Fed is done raising rates, and incoming data continue to defy hard-landing fears.
What we could be looking at, then, is a stock market that needs more time to digest its strong gains, which means a market that has more of a sideways disposition with some volatile swings in between.
So, for the rest of 2023, I strongly believe it’s going to be a stock pickers market, and the focus will be on relative strength. Here at thetechtrader.com, that will be our focus on a daily and swing trade basis, as usual.
And remember, Trade what you see, not what you think!
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