Stocks slipped slightly this afternoon after the bear market rally ran into resistance at the June highs. The S&P and Nasdaq Composite closed barely lower on the day while the Dow eked out a minuscule gain.
With equities still looking overbought, today’s lackluster trading session had investors wondering whether the market could go much higher.
“The question is if the rally is running out of breadth,” noted Edward Jones strategist Angelo Kourkafas.
“There are certainly things that have improved after the past month that would justify, in our view, a move higher, which we have certainly seen. […] However, a lot has to go right to be able to say that the coast is clear.”
The next potential rally trigger comes this Wednesday with the release of the July Consumer Price Index (CPI). Bulls are hoping for a lower-than-expected inflation reading.
For a moment this morning, the S&P (as represented by the SPY) touched resistance (yellow line) before retreating lower. Bulls are truly at a make-or-break moment now, and if Wednesday’s CPI release doesn’t go well, stocks could easily retrace to the June lows (or worse).
But that hasn’t stopped money managers from calling off the bear market. Some, like BCA Research’s Doug Peta, believe the bottom is already in for the year.
“We continue to expect the economy will be surprisingly resilient, allowing equities to rally further before the Fed squashes the expansion. We doubt the rally will persist very far into 2023, however, so we are reducing equities to equal weight over a twelve-month timeframe,” Peta told clients.
That’s a bold prediction considering that the Fed hasn’t officially pivoted just yet. Remember that the market was treated to a blowout July jobs report Friday morning, which should only push the Fed toward a more hawkish direction.
The yield curve remains inverted, too, and is on track to invert further. The classic long-term bear market signals – a hiking Fed and yield curve chaos – are there.
Pending a sudden about-face from Powell & Co., stocks should get hit with a bear market continuation.
That’s also true for semiconductor stocks like Micron (NASDAQ: MU, which closed below the 10-day moving average today after setting a lower high. The stock also broke out beneath its bullish trend (yellow trendline) today.
Plus, the stochastic indicator suggests that MU has plenty of room to fall. For those reasons, it might make sense to take MU short with a trade trigger of $60.37, below today’s low, as the general market does battle with key resistance at the June highs.