Indices Supported By A “Flat Squeeze”

The S&P 500 is up nearly 3.0% for the week and the Nasdaq Composite is up nearly 4.0% for the week. We’re going to go out on a sequoia tree limb, then, and say right now that the S&P 500 will log its fifth straight, winning week and that the Nasdaq will log its eight straight, winning week when it is all said and done today.

Today, by the way, is a quarterly options expiration day, so one should expect to see heavier-than-average trading volume. Yesterday saw a pickup in trading volume, perhaps not as much as one might have thought given the scope of the gains across the market, but a pickup nonetheless that was heavier than usual.

It is hard to say if that had anything to do specifically with today’s quarterly expiration, but it isn’t hard to say that it most likely had to do with a fear of missing out on further gains.

We could see in market breadth figures, which favored advancers by a roughly 3-to-1 margin at the NYSE and a slightly less than 2-to-1 margin at the Nasdaq, that “everything” didn’t participate in yesterday’s rally but it kind of felt like that was the case.

Nonetheless, ongoing leadership from the mega-cap stocks, a gainful effort by the value indices, wins for all 11 S&P 500 sectors, and a 1.2% gain in the Invesco S&P 500 Equal-Weight ETF (RSP) created an aura of bull market activity that was pulling sidelined cash into the action.

The popular narrative is that the move by the broader market on Thursday — and the one seen throughout June — was fueled by a prevailing sense that the Fed is done, or close to being done, raising rates. For what it’s worth, that move left the market-cap weighted S&P 500 trading at 19.1x forward twelve-month earnings, which is a 10% premium to the 10-year historical average of 17.3%, according to FactSet.

There is some residual consternation about the multiple expansion in the face of a slowing economic environment, yet money flows have been the stock market’s friend as visions of a soft landing for the economy and a subsequent acceleration in earnings growth six months from now have seemingly overshadowed valuation concerns for the time being.

If there is an immediate source of angst, it might be the contention that stocks are overbought on a short-term basis and due for a pullback. Ironically, that same consideration is why the major indices have continued to press higher. The notion that they should experience a pullback is in the mainstream, but because they haven’t lived up to that notion is exactly why they have continued to press higher, as portfolio managers and investors missing the rally are finding it tough now not to participate.

It is the essence of a “flat squeeze.”

In any case, few participants would be surprised to see some consolidation activity given the parabolic move this month, yet the equity futures market suggests that move may still have to wait.

Currently, the S&P 500 futures are up 12 points and are trading 0.2% above fair value, the Nasdaq 100 futures are up 58 points and are trading 0.4% above fair value, and the Dow Jones Industrial Average futures are up 57 points and are trading 0.2% above fair value.

Better-than-expected earnings and guidance from Adobe (ADBE), which is keeping the AI buzz going, and word from the Bank of Japan that it is going to keep its ultra-loose monetary policy in place have kept market bulls engaged and will presumably keep the indices on their winning path when trading begins.

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Originally Posted June 16, 2023 – Indices supported by a “flat squeeze”