The S&P 500 moved by +0.88% this week. From Monday to Wednesday, the index traded within a trend channel, from which it broke out on Thursday. The sideways movement has reduced the short-term overbought condition, providing some upward potential for the S&P 500. On Friday, February 16th, our indicators signaled, triggering a new trading signal. The position is currently up by 1.9%.
As discussed in recent weeks, the 5000 points mark is a significant psychological milestone. Now that this target has been reached, the question arises: what comes next? The S&P 500 is more than two standard deviations away from its 50-week average, an extreme situation that occurs less than 5% of the time. A larger correction can be expected from such medium-term extremely overbought levels, although there may still be further upside potential before that occurs. Timing such a correction correctly is very difficult.
The macro environment remains negative, with various signals from the Risk Level Indicator (RLI) increasingly confirming this. My base case scenario is for rising prices until a recession in the USA or a credit event (Credit Crunch) in the spring of 2024. Especially noteworthy is the BTFP (Bank Term Funding Program) by the FED, which was launched after the banking crisis last year to support banks that have been struggling due to high interest rates. This program is set to expire in March. The RLI will identify emerging problems in a timely manner and adjust the risk level accordingly. At the moment, a somewhat defensive allocation to stocks is advised.
Furthermore, we are approaching the liquidity squeeze in mid-March. There are four liquidity squeezes in a year, always in the middle of the last month of the quarter. Mid-March and mid-September are the strongest squeezes, while mid-June and mid-December are more moderate. These liquidity squeezes can lead to increased stress in the financial system and are the reason why credit events such as Lehman Brothers or the banking crisis in 2023 occur during these periods.
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