Equities report: US stock markets ripe for a correction lower?

US stock markets seem to have edged higher since our last report as S&P 500 and Nasdaq edged higher, reaching new record highs. Yet Dow Jones diverges maintaining a sideways motion. In this report, we are to discuss some fundamental issues and finish off the report with a technical analysis of S&P 500 daily chart. We also note that today, US markets are to remain closed for the Juneteenth federal holiday.

The Fed’s stance

Since our last report, we note that we had the release of the Fed’s interest rate decision. The bank as expected remained on hold displaying a data dependency in its accompanying statement, yet the new dot plot in the bank’s economic projections moved higher, implying that Fed policymakers are prepared to keep rates high for longer clipping the gains of US stock markets for the day. Yet in his press conference, Fed Chairman Powell stressed once again the bank’s data dependency. Nevertheless the market still tends to price in the bank to cut rates twice this year, once in September and once in December. Yet even after the Fed’s interest rate decision, Fed officials seem to be advising patience regarding any rate cuts. It’s characteristic that Philadelphia Fed President Harker highlighted that he would be satisfied with only one rate cut this year, while others mentioned that more data about inflation are required before the bank starts cutting rates. Overall, despite the bank’s policymakers accepting the scenario of starting to cut rates this year, they also seem to show some hesitation. Should we see Fed policymakers contradicting market expectations by highlighting the scenario of one rate cut only, we may see the market mood turning more cautious which in turn could weigh on US Stock markets.

AI frenzy catapults NVIDIA to first position

US stock markets are dominated by an AI frenzy which is pushing the tech sector higher. It should be noted that the tech rally and the markets’ focus on AI catapulted Nvidia in becoming the world’s most valuable company, over mega-cap tech peers such as Microsoft and Apple. Nvidia’s share price rose 3.5% yesterday, putting its market value at around $3.3 trillion. It should be noted that NVIDIA proceeded with a 1-10 stock split last week. Despite the stock split as such not adding any value on NVIDIA’s share price, it does make the share more attractive and could boost demand. Yet we still view the market’s AI frenzy as the main factor behind the demand for NVIDIA’s share price. The company is considered by markets as maybe the main beneficiary of the AI development, given that it produces chips that are in high demand and support with computing power Artificial Intelligence.

Has the market reached too far?

Yet it’s not only NVIDIA that is gaining from the market’s focus on AI. Other companies such as Microsoft which is also considered an early AI adopter and is winning ground as it partners with OpenAI, which created ChatGPT. The market’s optimism about the prospects of AI and the possibilities it may unlock, are wide. It’s characteristic that the AI-fueled rally pushed the S&P 500 to the 5,500 psychological threshold, after multiple all-time highs during the first half of the year, while NASDAQ also has a similar course, breaking one all-time high after the other. It remains questionable whether the market’s rally is fundamentally sustainable given also the hesitance of Fed policymakers to proceed with substantial rate cuts within the year and the dependency of tech companies to leveraged funding. Hence we tend to issue a word of caution, for a possible correction lower, as US stock markets may be nearing if not already in a bubble.

تجزیه و تحلیل فنی

US500 Daily Chart

• Support: 5350 (S1), 5195 (S2), 5055 (S3)
• Resistance: 5500 (R1), 5650 (R2), 5800 (R3)

S&P 500 continued to edge higher yesterday and is currently testing the 5500 (R1) psychological threshold, reaching new all time highs. The upward motion seems to be maintained as the index’s price action forms higher highs and higher lows. At the same time, the upward motion seems to be also accelerating as the price action diverges from the upward trendline showing the limitations for the bulls. Please also note that the 20 moving average (MA) which is also the median of the Bollinger bands, the 100 MA and the 200 MA are all pointing upwards also implying a bullish direction for the pair. Hence we tend to maintain our bullish outlook for the index. Yet we have to note that the RSI indicator has surpassed the reading of 70, highlighting the strong bullish sentiment of the market for the index, yet may also be implying that the index is at overbought levels, and may be ripe for a correction lower. Should the bulls maintain control over the index’s direction, we expect S&P 500 to break the 5500 (R1) resistance line and set as the next possible target for the index 5650 (R2) resistance barrier. For a bearish outlook, we would require the index to break the prementioned upward trendline in a first signal that the upward motion has been interrupted, break the 5350 (S1) support line clearly and start paving the way for the 5195 (S2) support base.

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