The U.S. stock market retreated after briefly hitting a 14-month high on June 16, but there is still reason to expect the recent rally in risk sentiment to continue and push markets higher short term.
“We know this is old news at this point, but on June 8, 2023, the S&P 500 entered a new bull market,” to write analysts at LPL Research. “After such a strong rally from October lows, this young bull probably needs a break.”
Examining the stock market’s momentum bias via an ETF pair suggests that the bulls are still driving the trend. So-called high beta (i.e. high risk) stocks (SPHB) versus low volatility (low risk) stocks (SPLV) continue to point to more potential.
Examining the internals of the market through sector trends highlights a number of strong technical patterns that are helping to drive the stock higher. Homebuilders (XHB), for example, continue to perform strongly against the broader market (SPY).
Semiconductor stocks (SMH), which are seen as an indicator of risk appetite, are also showing strength relative to stocks in general (SPY).
The price bias for stocks (SPY) versus bonds (BND) is also firmly positioned in favor of risk lately.
Part of the reason for the improving market sentiment has to do with the growing belief that inflation has peaked, which is reflected in the downward price trend lately for pegged Treasury bonds. inflation (TIP) versus conventional treasury bills (IEF).
Looking at risk from a global asset allocation perspective also suggests that market sentiment remains bullish. The ratio of aggressive asset allocation (AOA) to conservative allocation (AOK) remains in an uptrend and has recently broken above its previous high.
Skeptics can rightly point out that a number of threats could surprise markets with bearish news. If inflation stays higher for longer than expected, for example, central banks may decide to keep interest rates high for an extended period, perhaps pushing rates higher in the months ahead.
“We also have to recognize that central banks have done quite a bit… But having said that, we think they should continue to tighten and, more importantly, stay high for some time” , said Gita Gopinath, First Deputy Managing Director of the International Monetary Fund. “Now this is different, for example, from what several markets are expecting, that things are going to come down very quickly in terms of rates. I think they have to be on hold for a lot longer.
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