Caution is advised

Dear Readers,

last week the market was once again deep green and the S&P 500 even broke out to new yearly highs. The Nasdaq completed the best first half of the year of all time and the Dax and Stoxx also had a strong Friday once again.

The economic data in the USA that was presented on Friday was surprisingly positive. Personal consumption expenditures in the USA rose by 0.3% on a monthly basis and by 4.6% compared to the previous year. Meanwhile, personal spending rose significantly less than income on a monthly basis. The sentiment of US consumers continues to improve as their short-term inflation expectations decline. Friday's reaction was an emotional one and in my opinion not a well-founded one.

Nevertheless, or precisely because of this, I am of the opinion that the easy gains have been made for now and a more difficult and volatile stock market phase will follow. My expectation of recent months, that the recession, if at all, will be a very mild one, is entering the mainstream. I increasingly see articles in high-reach media that it might be time to look optimistically at the stock market (e.g. CNN: https://edition.cnn.com/2023/06/26/investing/premarket-stocks-trading/index.html). These are clear indications that sentiment is tipping into euphoria and the market is overheating.

I don't trust this strength of last week. The market must first undergo consolidation again and digest the recent extreme gains on the American side. In the best case, the consolidation can tend sideways with a slight upward trend. However, a downward movement is significantly more likely.

Two weeks ago, I issued the first warnings in the Premium market commentaries, after I had been unreservedly positive for the markets since autumn 2022. Two formations particularly catch my eye.

Firstly, the price behavior of the S&P 500, which now shows weakness in relative comparison at Friday's close for the second time in a row. This is not unusual in itself, that some profits are quickly taken before the weekend, but in the weeks before, the strength on Friday was very pronounced. In addition, I now see a short-term divergence in the RSI on Friday, June 30th, a sign of weak momentum. Should weaker prices emerge on Monday, Tuesday, this would also lead to a longer-term divergence in the daily chart.

The second striking piece of the puzzle is the volatility index VIX, which has formed a bottom in recent weeks and also shows a divergence that suggests medium-term rising volatility and falling stock indices. The generally positive signal of the VIX, which was established and triggered when the long-term upward trend was broken at 17 to 19 points, is unlikely to be seriously endangered. But another test that catapults the VIX to 20 or even 24 points seems appropriate here.

In short, the chances for a medium-term cooling of somewhat heated spirits is likely at this point. The target is 4200 or even 4000 points, a correction of around 10%.

 

Much success

Lars Wißler