/ June 30 / Weekly Preview
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Monday:
N/A
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Tuesday:
ISM Manufacturing PMI (48.8 exp.)
JOLTs Job Openings (7.3M exp.)---
Wednesday:
N/A
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Thursday:
Non Farm Payrolls (110K exp.)
Unemployment Rate (4.3% exp.)
ISM Services PMI (50.5 exp.)
Initial Jobless Claims (240K exp.)
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Friday:
Market Closed -
Monday:
Progress Software Corporation
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Tuesday:N/A
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Wednesday:
N/A
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Thursday:
N/A
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Friday:
N/A - Market Closed
Bearish Narratives Collapsing
The S&P 500 and the Nasdaq both set all-time highs last week. The performance was especially remarkable given the amount of bearish headlines, perceived geopolitical risks as well as a stubborn Federal Reserve — intent on not cutting rates.
As such, the bulls remain clearly in control. With the S&P 500 closing above 6100 and continued strength in the mega-cap space, the market has successfully climbed a “wall of worry”, leaving bears with not a lot of ammo left in terms of narratives. Despite some pockets of sector underperformance, key technical indicators suggest bullish momentum remains intact (with a couple of key caveats).
A breakout above the recent consolidation range puts SPY on course to test technical resistance at $623;
There was strong follow through on increasing volume on Friday - in conjunction with fresh all-time highs — this is very encouraging;
The 20-DMA provides dynamic near-term support, which should hold going forward;
A “Golden Cross” is approaching with the 50-day set to cross above the 200-day moving average next week;
Finally, the MACD signal has also turned bullish, confirming upward momentum;
This technical breakout occurs just as another bearish narrative has collapsed: the fear of WW3. The U.S. precision strike on Iran’s nuclear enrichment facilities was described as a complete victory by president Trump. Iran’s response was mostly to save face, as their missile attack was intercepted and caused no casualties. Markets interpreted this as a de-escalation, as Iran avoided actions like closing the Strait of Hormuz, which would have severely disrupted global oil supplies. Furthermore, Russia and China remained on the sidelines in this conflict, and the whole narrative simply died down.
Now is a good a time as any to remind our readers of other recent failed narratives just in the last year:
Deepseek
Moody’s debt downgrade
De-dollarization and the “Sell America” trade
and, of course… Tariffs
With the market recovering after every such instance, it’s not surprising to see a more optimistic outlook from investors. July tends to be a better performing month overall, showing positive returns on all tracked metrics according to Carson Research.
Despite the aforementioned media-driven narratives, earnings estimates remain bullish and are expected to modestly grow into the next year. We didn’t see a more pronounced sell-off in April partly because the hit to earnings was not expected to be larger. Correction events that did take the market lower also coincided with sharp downward revisions to forward earnings estimates.
Instead, what we got is a rebound in the number of BUY ratings, as analysis cover their tracks and ratchet Price Targets higher, to align with market realities.
The overall year-over-year growth rate for S&P 500 companies remains quite low, at just 5%. We would expect the overall trajectory of the market to eventually align with this rate of growth. As of May and June, revised year-end targets from major Wall Street banks average at around 6.280 for the S&P 500 index.
On an adjusted chart, this is precisely what we’re looking at, also taking into account the deceleration in EPS growth. At $679, SPY would be as overbought as it was oversold when it hit $510 in April. While currently unthinkable for the bearish inclined investor, that’s what the supply versus demand math suggests.
Investors who missed the rally are most likely paralyzed at this point and forced to re-calibrate. They include some large institutions and hedge funds, which are lagging the benchmark index by around 8 percentage points over the last 3 months. From a portfolio management perspective, their actions were not “wrong” by any means — professional investors are more concerned about not losing capital than about generating performance.
This creates an environment where dips will be aggressively bought, and the data is reflected in positive GEX values and limited Dark Pools buying (in individual names).
From a sector rotation perspective, the market is seeing potential for near term capital flows coming out of heavily overbought industries with limited upside (Tech, Consumer Discretionary, Industrials) into less popular areas, with limited downside (Energy, Utilities, Real Estate).
Among asset classes, we are also seeing the tell-tale signs of a risk-on rotation, with Gold registering a drop in performance and Treasuries starting to pick up from very low values (we would make the argument that treasuries are looked upon as a riskier asset now than Gold, though historically that would not necessarily be the case).
Our Trading Strategy
Since we are already well allocated to risk in both stocks and bonds, our positioning doesn’t need a lot of tweaking. Our Sector Correlation table reveals that we’d benefit from an increased participation in the “Value” part of the market and among mid-caps. Normally, this should arrive as part of a broadening rally, especially as mega caps have already stretched well within striking distance of analyst price targets.
Our limited exposure to Emerging Markets (EEM) as well as Foreign Developed Markets (EFA) also makes sense, since these factors have well outperformed the S&P 500 over the past year and are due for a pullback.
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