Morgan Stanley’s Mike Wilson believes that investors should sell the news.
There are several substantial risks in the financial market.
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The SPDR S&P 500 ETF Trust (SPY) ETF is hovering near the highest point since August last year despite the rising risks in the market. The SPY stock was trading at $420, which was 21% above the lowest level in 2021. Similarly, Invesco QQQ and Dow Jones ETF have also soared by over 20% in the same period.
The SPDR S&P 500 ETF has jumped despite several risks hanging in the market. First, there is the risk of US defaulting on its debt obligations if Democrats and Republicans fail to agree on the debt ceiling issue. Joe Biden and Kevin McCarthy will meet today to deliberate on these issues. Despite the risks, the market seems to suggest that the two sides will ultimately reach a deal. In a note, Mike Wilson of Morgan Stanley said:
“With the S&P 500 testing the upper end of its trading range, are we on the cusp of a breakout that confirms a new bull market? We don’t think so… The debt ceiling remains a key risk even if a deal is made—i.e., sell the news.”
Second, there is a lingering risk that the ongoing earnings recession will continue in the coming months. The most recent earnings showed that eanings growth plunged to the lowest level since 2020 at the height of the pandemic. This performance was offset by big-tech companies like Meta Platforms and Apple.
Third, there is a risk that the US economy will sink into a recession because of the challenges in the banking sector. Several important banks like First Republic, Credit Suisse, and Silicon Valley Bank have all collapsed this year.
As a result, most banks will now move to capital preservation, which will see them limit their lending. This is notable since most regional banks offer services that the likes of Bank of America and JP Morgan don’t provide.
The daily chart shows that the SPDR S&P 500 ETF has been in a strong bullish trend in the past few months. It has already formed a golden cross pattern, which happens when the 50-day and 200-day moving averages make a crossover.
The ETF has also jumped above the important resistance point at $416, the highest point on February 2 and May 1. It has also moved close to the 61.8% retracement level. Therefore, I believe that, technically, we might see the return of the raging bull despite the rising risks.
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