S&P 500 losing steam going into June

AS AT May 30, the Dow Jones Industrial Average (DJIA) had risen 0.8 per cent, the S&P 500 4 per cent and the Nasdaq 7 per cent. The strong performance was led by Nasdaq, which is having its best month since November 2023 when it rose 10.7 per cent.

Heading into the final week of May, the indices were generally on track for a losing week, with the Nasdaq dipping after breaking the 17,000 record-high level. The main catalyst for the week was rising US Treasury yields, which dented investor confidence. There were also concerns that the performance of large-cap tech was masking the actual weakness in the overall market. While the S&P 500 index rose about 10 per cent this year, the equal-weighted index has only gained about 3 per cent.

Bullish scenario

The S&P 500 has been on a general uptrend since October 2023. The index recently touched the 20-day simple moving average (SMA) level, where it may either immediately rebound or dip further to the bottom of the channel around 5,180 before seeing a potential rebound.

General sentiment remains strong despite expectations for rate cuts being pushed back. Thus, short-term inflation data might lead to short-term volatility but allow the uptrend to remain intact until definitive action is taken by the US Federal Reserve.

Bearish scenario

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The S&P 500 might see a further correction if it fails to hold above the 100-day SMA level around 5,080. Breaking below this channel could see the index retesting the 5,000 psychological level, which serves as the main support zone between 5,000 and 5,080. Within the larger channel, the index first broke below the upper channel, within which it had been trading from November 2023 to April 2024. It is currently approaching the lower region of the channel and may enter a bearish period with consecutive declines, despite a slight rebound on May 24.

Based on the short-term Fibonacci retracement levels, the 0.618 level of 5,191 coincides with the lower end of the channel. If this support level is breached, it would indicate further signs of weakness going into the second half of this year.

The writer is dealing manager of Phillip Securities