![]() ![]() For example, only 43% of S&P 500 stocks are trading above their 200-dma, compared to 79% when the market notched its February high. Fewer and fewer stocks are participating in the latest advance, while leadership is highly concentrated in only a handful of mega-cap names. With major resistance coming into play only marginally above current S&P 500 levels, we believe the reward-to-risk profile has become less attractive.ĭiverging market breadth represents the ugly portion of the technical story. The bad news is that the next major area of resistance sets up near 4,300, which traces back to the August 2022 highs and lines up with a key retracement level of last year’s bear market. Furthermore, after several failed attempts, the index finally surpassed resistance at 4,200 ( Figure 1). The good news is that the market remains in an uptrend and above its rising 50- and 200-day moving averages (dma). The technical setup for the S&P 500 is a story of the good, the bad, and the ugly. Reason #2: The S&P 500 Is Facing Strong Technical Resistance The average loss for the S&P 500 during the six months before a recession has been 1.4% historically, based on data since 1970, though the index did gain nearly 10% ahead of the 19 recessions. If and when a recession begins, the impact on capital markets will likely be mixed since some sectors could skirt the full impact of an economic contraction as upper income households release pent up demand for experiences within the services economy. The latest Federal Reserve (Fed) Beige Book revealed a recession already started in the trucking and freight industries, and perhaps this is a leading indicator of a broader slowdown in business activity in the months ahead. Despite Friday’s strong jobs report, cracks are appearing. However, the solid labor market and elevated surplus savings are delaying the onset of a broad based contraction. Our base case is for the economy to slip into a mild recession by end of 2023. Reason #1: Recession Is Likely by Year End There are five primary reasons why the LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) is lowering its recommended equities allocation to neutral today. FIVE REASONS WE’RE LOWERING OUR EQUITIES ALLOCATION Importantly, though, neutral is not bearish. But with stocks at higher valuations, high-quality bonds offering attractive yields, an S&P 500 Index with concentrated leadership facing technical resistance at 4,300, and an elevated risk of a late-2023 recession, we think it makes sense to be a bit careful here. We have recently made the case in this publication that there are a lot of reasons to expect the market to go higher between now and year end. Stocks have had a nice run, but at higher prices, the bar for further gains gets higher. Jeffrey Buchbinder, CFA, Chief Equity StrategistĪdam Turnquist, CMT, Chief Technical Strategist
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