This week, the S&P 500 had a gain of exactly 0.0%. The index essentially went nowhere until a significant loss on Thursday. However, on Friday, the index managed to recover, bringing it back to even. Despite the mid-week volatility, the overall performance remained flat.
Our last position which we placed has been active since April 25th. The position is currently up by 13,4%.
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Since the April low, the S&P 500 is up 8.5% from peak to trough. During this time, the index formed a trend channel (orange on the chart) that has contained the price so far. Last week, we mentioned two possible support zones, and on Thursday, the S&P 500 dipped into the first support zone. This proved to be a good buying opportunity as the S&P 500 managed to bounce back up on Friday. The market structure is still bullish, and any retest of support is a buying opportunity. However, the index is a bit overbought right now, and the upside is probably limited. As always, any entry must be protected by risk management, and this is especially true right now. Next week, it will be important for the S&P 500 to hold the lower trend line of the channel. If this trend line is broken, it will be a clear sign of increasing downside risk.
The next few months
The seasonality for the S&P 500 in an election year anticipates weakness in May and then strongly rising prices until early September. This is usually followed by a bigger correction until the election in early November. It is possible that the correction in May occurred a month earlier this year, and we are now moving up until September. Of course, the seasonality data should be approached with caution, especially this year because we have already seen a significant rise in prices.
The macroeconomic environment is showing negative signs, with our Risk Level Indicator (RLI) increasingly confirming this outlook through various signals. The risk of a credit event remains elevated, adding to the prevailing economic concerns. Of particular note is the Federal Reserve’s Bank Term Funding Program (BTFP), which was initiated in response to last year’s banking crisis to aid banks struggling with high interest rates. However, this program has now expired, and banks are required to gradually repay the loans to the Fed over the course of a year. The RLI will promptly identify emerging issues and adjust the risk level accordingly, providing valuable insights for investors. Currently, a somewhat defensive allocation in stocks is advisable, given the uncertain economic climate.
The world of finance is complex and includes many technical terms. For explanations of these terms, I recommend using the Investopedia dictionary.
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