To The Moon

After a dismal 2022, the stock market has had a good 2023. The S&P is up 12% for the year and 20% since the market bottomed in October.

Several factors have led to a great start in 2023, but trouble is on the horizon. Looking at only a few key charts, the market is over-extended.

A pull-back is due, albeit probably a small one but one that can be opportune.

SPY

Below is a chart of $SPDR S&P 500 ETF Trust(SPY)$ from November 2021 to the present.

$SPX | TradingView

Since the market bottomed out in October, it has been in an uptrend. This is showcased by the black arrows with higher highs and higher lows, a telltale sign of an uptrend.

But with the SPX closing at $4,282 on Friday (June 2), it’s approaching a major hurdle. The high in August was around $4,325. Just a hunch, but I could foresee the trend getting rejected around that price and falling back.

On the other hand, the long-term chart is still attractive.

Above is a chart of $SPDR S&P 500 ETF Trust(SPY)$ from 2015 to the present, with each bar representing one month. In this time period, the market has been on a long-term up trend. The 50 moving average, the pink line, has been a great indicator of when to buy in, if you invest for the long haul.

In late 2018, we approached the 50 MA, and then the market rebounded. In March-April 2020, we closed below the line but then ripped up, setting new highs. And again, in September-October 2022, we flirted with the line, even going below it for a few days, before witnessing the current rebound.

I believe in the long-term success of the US and the stock market to where a chart is not needed. But seeing this reassures me we will be alright in the long term.

The 10 MA, the blue line, is another great indicator of the medium-term trend of the market. We’ve been steadily above it since March, and the market has done well since then. As long as we stay above that line on the next pull-back, we should be alright.

VIX $Cboe Volatility Index(VIX)$

The VIX is known as a volatility index, but the way I think about it: if the market goes up, VIX goes down, and vice versa.

For a long time, VIX was trading between ~$35 and ~$18. I used it as my indicator of when to buy into the market. As VIX got into the $30s, the SPY would be low, and I’d expect it to bounce back, so I’d pick up some shares.

But something changed in April; I patiently waited for the SPY to fall since VIX was around $18, but it never did. My cash has just been sitting on the sidelines. If we look back at 2021, though, VIX did trade around the $14 range it currently is at.

But even then, it usually did not go much lower than $14, driving my conviction that we are due for a small pull-back in the SPY.

Macro Factors

It wouldn’t be proper to look at charts without discussing other factors. I never buy or sell on charts only; I weigh economic conditions much more heavily.

The stock market has done well in 2023 for a variety of reasons. Inflation has subdued, we see an end in sight to the Federal Reserve’s rate hikes, and AI hype has exploded.

The most recent increase in the stock market was pushed up due to the passage of the new debt ceiling; SPY was up 3% last week as a result.

But I’m not confident these factors can keep the market up.

What if inflation stays elevated? Have we factored in the Fed might keep rates high for an extended time? We are still years away from AI reaching its potential. We passed a new debt ceiling, which is just kicking the can down the road.

Final Thoughts

One of my worst stock trades of all time was in VXX. Since one cannot buy VIX, I had to purchase shares in VXX instead.

Sitting here today, I’m tempted to buy into VXX again.

fool me once, shame on you; fool me twice, shame on me

The wiser decision is to wait for the SPY to pull back and buy in when it does. Then I can hold it for life, in comparison to having to time when to sell VXX.

Follow me to learn more about analysis!!