To The Moon

Key points:

• Investors should brace for sharp swings in the weeks ahead as the stock market faces a trio of headwinds.

• Growing fears over the Fed, U.S. Q2 earnings seasons, as well as extreme sentiment positioning a pullback.

• Follow buying opportunities after pullback on High-quality shares that are showing strong relative strength amid the current market environment.

Investors should brace for fresh turmoil in the weeks ahead as the stock market faces a growing risk of a near-term pullback.

Cracks are widening in the year-to-date rally on Wall Street, with the blue-chip  $DJIA(.DJI)$  now up +1.78% on the year. Meanwhile, the benchmark $S&P 500(.SPX)$  S&P 500 and the tech-heavy $NASDAQ(.IXIC)$  have trimmed their year-to-date gains to +13.71% and +29.9%, respectively.

With the market facing a trio of headwinds, the weeks ahead will likely be more volatile than usual. Below are the short-term reasons involves.

1.Hawkish Fed

Fed Chair Jerome Powell on Wednesday affirmed that more interest rate hikes are likely ahead as inflation is “well above” where it should be, pouring cold water on investors who had hoped the central bank was close to the end of its tightening cycle.

Powell stuck to his hawkish stance on interest rate hikes in his congressional testimony, reiterating the fact that the central bank remains "strongly committed to bringing inflation back down to our 2% goal."

Financial markets are currently pricing in a 25-basis point rate increase in July and no further hikes after that. Taking that into consideration, there appears to be a growing risk that the Fed could raise rates to levels above where markets currently anticipate, resulting in a correction over the near term.

2.Looming Q2 Earnings Season

Wall Street's second-quarter earnings season will begin in less than a month and investors are bracing for what may be the worst reporting season in three years.

After earnings per share for the  $S&P 500(.SPX)$ fell -2.0% in the Q1 2023, earnings are expected to drop -6.4% in the Q2 2023 when compared to the same period last year, according to data from Factset.

If -6.4% is confirmed, that would mark the largest year-over-year earnings decline reported by the index since the second quarter of 2020. It will also mark the third consecutive quarter in which S&P 500 earnings have declined year-over-year, more than meeting the technical definition of an earnings recession.

And its a higher percentage of companies will lower their outlook for earnings and sales growth for the months ahead considering the current economic climate.

3.Extreme Bullish Sentiment

Two of the most followed sentiment indicators show signs that the market is becoming increasingly frothy, melting up with the mega-cap tech stocks as investors chase the bull.

• The CNN Fear & Greed Index, a sentiment gauge that combines seven different indicators has flashed a ‘Greed’ signal for over a month, with sentiment even reaching ‘Extreme Greed' levels in recent sessions. The Fear & Greed index is often used as a contrarian indicator, flashing potential market turning points when sentiment reaches extreme levels of bullishness or bearishness.
  

Fear and Greed Index,Source: CNN

• The latest American Association of Individual Investors (AAII) Sentiment Survey showed 42.9% of American individual investors expressed a bullish outlook for the next six months, not far from the highest level of bullish sentiment since November 2021. Only 27.8% of individual investors expressed a bearish outlook, marking the first time it has been below 30% for three consecutive weeks since November 2021.

AAII Investor Sentiment, Source: AAII

• Moreover, the AAII survey revealed that the bull/bear spread indicates that upside positioning is crowded, and downside protection is attractively priced.
  

AAII Bear-Bull Spread,Source: AAII

What to Do Now

Investors should be prepared for a scenario in the coming weeks which could see the $S&P 500(.SPX)$ fall to the 4,130 level - a decline of almost 6% from where it currently stands.

And it is recommend to rebalanced your portfolio of individual stocks and ETFs in recent days to reflect a mostly bearish position and I have been cautious about making new purchases.

For like $Dow30 Bear 3X ETF(SDOW)$ , $ProShares Short S&P500(SH)$, $ProShares Short Russell2000(RWM)$

Nonetheless, a pullback could create new buying opportunities in leading stocks in the tech and growth sectors.

Some high-quality stocks that are showing strong relative strength amid the current market environment, the list include $Apple(AAPL)$ , $Microsoft(MSFT)$ , $Alphabet(GOOG)$ , $Tesla Motors(TSLA)$, $Meta Platforms, Inc.(META)$, $Visa(V)$ , $Johnson & Johnson(JNJ)$, $UnitedHealth(UNH)$, $Exxon Mobil(XOM)$ Exxon Mobil (NYSE:XOM), $MasterCard(MA)$ , $Broadcom(AVGO)$ ), $Chevron(CVX)$ , $Merck(MRK)$, $AbbVie(ABBV)$ , and $Costco(COST)$ to name a few.