Posted by Adam Turnquist, CMT, VP Chief Technical Strategist
Tuesday, May 31, 2023
Key Takeaways:
- A June swoon may be in the cards as the S&P 500 struggles to clear key resistance at 4,200.
- While a deal in Washington could be a catalyst for a breakout, overbought conditions in the technology sector and mega-cap space—the primary drivers of this year’s market advance—could make this a high hurdle for the market to clear on a near-term basis, especially without broader participation.
- The technical setup for the technology sector remains bullish, but the rally may be a little too much too fast as overbought conditions are now widespread.
- The good news is that if there is mean reversion, it would likely be back toward the sector’s uptrend and provide a potential pullback opportunity for investors seeking a better entry point into tech.
- Don’t expect any seasonal tailwinds for stocks next month. June has historically been an underwhelming month for both the S&P 500 and the technology sector.
There is no shortage of headlines referencing the “sell in May and go away” seasonal pattern for stocks, but perhaps investors should focus more on a potential June swoon. As debt ceiling negotiations progress in Washington before next week’s revised June 5 X-date, the S&P 500 continues to struggle with key resistance at 4,200. While a deal in Washington could be a catalyst for a breakout, overbought conditions in the technology sector and mega-cap space—the primary drivers of this year’s market advance—could make this a high hurdle for the market to clear on a near-term basis, especially without broader participation.
The technical setup for the technology sector remains bullish, but overbought conditions have become widespread. Perhaps the rally may be a little too much too fast, as the sector’s Relative Strength Index (RSI) is overbought along with over one-quarter of tech sector stocks. Even the ratio chart comparing the sector to the S&P 500 is well-extended above its rising 50- and 200-day moving averages (dma). While overbought conditions provide validation of the sector’s uptrend, and overbought does not mean over, odds for a shorter-term consolidation and/or pullback appear to be growing. The good news is that if there is mean reversion, it would likely be toward the sector’s uptrend and provide a potential pullback opportunity for investors seeking a better entry point into tech. In the event of a pullback, both the rising 20- and 50-dmas provide dynamic support levels to watch, along with the August highs near 2,650.
Seasonality
Don’t expect any seasonal tailwinds for stocks next month. The S&P 500 has generated average and median price returns during the month of 0.0% and 0.1%, respectively, making it the fourth worst-performing month since 1950. Furthermore, the index has only produced positive returns 54.8% of the time during June. For additional context, the S&P 500 has posted average monthly returns of 0.7% and finished positive 61% of the time for all months since 1950.
While the overall average June return is underwhelming, when the S&P 500 does trade higher during the month, the average return has been 2.5%. In contrast, when the S&P 500 trades lower during the month, the average June return has historically been -3.0%.
What About Tech?
The seasonal setup for the technology sector in June is even worse. Since 1990, the sector has generated average and median price returns during the month of 0.0% and -1.7%, respectively, making it the second-worst month based on average returns and the worst month based on median returns. Furthermore, the tech sector has only produced positive returns 42.4% of the time during June, the lowest positivity rate across the calendar.
Summary
A June swoon may be in the cards for the broader U.S. equity market. The S&P 500 continues to struggle with resistance at 4,200. At the same time, overbought conditions have become widespread across the technology sector, which is 1) responsible for most of the index gains this year and 2) carries around a 28% index weight. While overbought conditions provide validation of the tech sector’s uptrend, and overbought does not mean over, probabilities for a temporary consolidation and/or pullback appear to be growing. The good news is that if there is mean reversion, it would likely be toward the sector’s uptrend and provide a potential pullback opportunity for investors seeking a better entry point into tech. The LPL Research Strategic and Tactical Asset Allocation Committee maintains a neutral recommendation on the technology sector and is waiting for a better entry point.
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