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S&P 500 hits nine-month high on debt ceiling optimism

Outlook on the S&P 500 amid possible further monetary tightening, growth slowdown and ongoing US debt ceiling negotiations.

S&P 500 pit Source: Bloomberg

S&P 500 hits nine-month high on US debt ceiling optimism

The US 500 has finally managed to rise above its February and early May highs as hopes for an agreement to raise the US debt ceiling - for a 79th time since 1960 – greatly improved market sentiment.

The index has thus risen to a nine-month high despite an appreciating US dollar, rising yields and the probability of another 25 basis-point rate hike at the June Federal Reserve (Fed) meeting rising to around 30%.

S&P 500 Weekly Chart

S&P 500 Weekly Chart Source: Tradingview
S&P 500 Weekly Chart Source: Tradingview

Two consecutive positive quarters usually lead to further upside

Following on from two consecutive positive quarters – usually a sign of further strength – the S&P 500 might be on track for a third consecutive positive quarter if June ends up being a bullish month and as long as the index remains above 4,012.20.

This will probably very much depend on whether the political wrangling between the US Democrats and Republicans can, once again, avert a US debt default.

It has to be said that the US has never in its history reached the point of default where the Treasury was incapable of paying US debt obligations, though it has been close on several occasions.

Unlike most developed countries, the US sets a ceiling on how much it can borrow and because the US government spends more than it takes in, lawmakers must periodically raise that cap and some US politicians see that as a negotiating opportunity which leads to agreements often being made very close to the wire.

A default is very unlikely to happen, however, unless debt ceiling negotiations were to drag on for weeks into June.

What about seasonality and market breadth?

With US stock markets having entered the historically underperforming season of the year, between May and October, future gains within this period may turn out to be modest, with the majority of this year’s gains probably already having been achieved at the beginning of the year.

The lack of market breadth in the gains seen since October of last year worry some investors. The S&P 500’s market capitalization, which is up around 7.5% this year, has mainly been driven higher by the index’s seven largest stocks which make up 80% of the gains.

Having said that, weak market breadth and a gloomy economic forecast don’t necessarily mean that stock markets cannot continue to perform during the second half of the year.

Technical analysis on the S&P 500

The S&P 500 has this week finally managed to rise and close on the daily chart above its 4,195.44 February peak as market sentiment improved. This is good news for the bulls and allows them to aim for the August 2022 peak at 4,325.28. Perhaps even the February-to-March 2022 highs at 4,595.31 to 4,637.30 may be reached.

Another 3% to 11% gain above current levels (as of 19 May 2023) may be seen in the S&P 500 this year.

Provided the March-to-May uptrend line at 4,114 continues to guide the index higher, a bullish bias remains in play. More importantly, as long as the late April and current May lows at 4,049.35 to 4,048.28 underpin on a daily chart closing basis, the medium-term uptrend remains valid.

S&P 500 Daily Chart

S&P 500 Daily Chart Source: Tradingview
S&P 500 Daily Chart Source: Tradingview

Only if the early May low at 4,048.28 were to unexpectedly be fallen through on a daily chart closing basis, would an interim top likely be formed with the 200-day simple moving average (SMA) at 3,975.57 then being in focus.

As long as the next lower December and March lows at 3,808.86 to 3,764.49 underpin on a weekly chart closing basis, the October-to-May long-term uptrend stays intact.

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