Bulls Have Nothing to Fear This Expiration Week

The SPX's 4,325-4,350 area, or its 40-day moving average, is an area to watch

Senior Vice President of Research
Jul 17, 2023 at 9:11 AM
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"Over the past 10-years, July has been positive 90% of the time by an average of 3.1%, and in particular, the next two weeks being the strongest -- with this week being positive 80% of the time by an average of +1.22%, and next week being positive 90% of the time by an average +1.11%, over the last 10-years."

- Monday Morning Outlook, July 3, 2023 

After a lackluster start to a historically strong two-week seasonal period for stocks, the S&P 500 Index (SPX - 4,505.42) closed the first half of July by following its bullish script.

It was not a smooth ride, however, as the index first pulled back to its upsloping 20-day moving average on July 8 before powering to its highest level since early April 2022 at Friday’s high point. The SPX closed the first half of this month 1.2% above its June 30 close at 4,450, as it continues to defy multiple strategist warnings of an upcoming selloff, starting in early April when the SPX was roughly 10% below its present level. 

In fact, the SPX rallied back above the 4,475 level last week, which is double its March 2020 closing low, when the world was responding to Covid-19. That region marked the high in April 2022 before a vicious decline into June 2022, and after a short-term bounce from the key 4,375 level.

In case you are wondering, the last 10 years have also produced bullish tendencies for the SPX in the second half of July, but not quite as bullish in comparison to the first half. Specifically, the SPX has been higher 70% of the time during this period, rising on average by 0.7%.

We enter expiration week with the SPX in the vicinity of its half-millennium 4,500 mark and in an “overbought” condition, according to its 14-day Relative Strength Index (RSI).  This is the third time an overbought condition (reading at or above 70) has occurred in 2023 and the second since mid-June. The early February overbought condition, with the SPX at the round 4,200 century mark, preceded a five-week decline. But the mid-June overbought reading, with the SPX nearing the 4,400-century mark, was worked off with no harm to bulls.

Speaking of no harm to bulls, the July 6 bearish island reversal pattern, which occurs when a gap higher is followed by a grouping of days that precedes a gap lower, did not have short-term bearish implications as such patterns did last year. In fact, Wednesday’s gap higher produced a bullish island reversal, which further pressured naysayers who may have viewed either the mid-June “overbought” condition and/or the early July bearish island reversal as opportune times to bet against the market.

MMO 0717

One thing I observed on Friday regarding the daily candlestick chart above, which gives you information about each day’s open, intraday high/low, and the close each day, is that Friday’s close was below the open, depicted by the blue candle.

Blue candle days, which occur when the SPX’s close is below its open, have led to at least a couple days of weakness in recent weeks, with the April 18, May 19, and June 16 blue candle days standing out. Those candlesticks occurred on days in which the SPX reached a multi-week or multi-month high.

Another common denominator in those three data points is that they occurred mid-month, just as Friday’s candle was mid-month. As such, don’t be surprised if we see a weak beginning to expiration week or an overall expiration-week pullback. But if any such weakness replicates recent periods of short-term weakness, bulls should not be shaken.

In fact, it would take an expiration week move below the SPX 4,325-4,350 area, or its 40-day moving average and trendline connecting higher highs in March through early May, to shake bulls’ confidence.

"There’s More Pain Ahead for S&P 500 as Profit Warnings Loom, Investors Say."

- Bloomberg, July 10, 2023 

"Hedge funds slash bets on US stocks after tech-led rally and pivot to Europe."

- Financial Times, July 12, 2023 

Earnings season began late last week and will be the focus of market participants in upcoming weeks. The good news is the outlook for earnings does not appear to be too robust, suggesting companies do not have a high hurdle to overcome. This could sway the overall earnings reaction picture in favor of bulls, especially with consumer price index (CPI) and producer price index (PPI) data last week suggesting profits margins should be healthy. 

Todd Salamone is the Senior V.P. of Research at Schaeffer's Investment Research.

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