The market was focused on the debt ceiling talks this week along with several speaking appearances by Fed Governors including Chair Powell. One positive was in the charts as the S&P 500 broke higher from a six week trading range after many gyrations and closed at one the highest levels since last summer.
What happens next? We could maintain positive momentum on the news of a debt ceiling deal that helps with inflation and the deficit. The Fed may pause at their June meeting, too. But neither is a done deal and the stock markets pushed higher anyway this week in anticipation of something good happening.
The Stock Market
In the chart below, you can see prices closed higher through resistance and the next target is the August high from last year at $432. The chart pattern since the October low has not been an impulsive rebound which means it is possible we are still in a bear market with a new low to come later this year. In the meantime, anything is possible in this environment which means bulls may get a run here until we see an overbought condition on the RSI below.
One decisive weakness of the stock market has been the very low participation rate (breadth) in the number of stocks steadily advancing which is a concern. The large-cap technology stocks have carried the indices higher which means many stocks remain in the doldrums. So, we should see market breadth improve if a bull market is going to re-emerge.
The Yield Curve
The yield curve below still signals rate cuts are coming later this year and that an economic slowdown is on tap. Credit spreads did widen this week and banks will continue to contract credit for small and medium size business. However, it could take many months before we see inflation data near 2% or for a negative GDP print.
Economic Data
- Rising interest rates are taking a toll on corporate America. Companies are filing for bankruptcy at the fastest pace since 2010. Some of the weaker companies are filing for bankruptcy as the flow of cheap money many relied on to survive has dried up in the wake of the Fed’s rate policy.
- The May NAHB Home Builder Index rose slightly this week despite builders facing shortages of construction materials and tightening credit conditions.
- The May Philly Manufacturing Index was negative for 11 of the past 12 months (-10.4 vs expectations of -20).
- Existing home sales for April totaled 4.28mm vs 4.43mm recorded in March.
- The national median existing-home price fell 1.7% in April from a year earlier to $388,800, the biggest year-over-year price decline since January 2012, according to the National Association of Realtors (NAR). Rising mortgage rates have made home purchasing far less affordable.
Thank you for being a subscriber!
Paul J McCarthy III
President, Kisco Capital