Downside Risk Heading into May!
The easy part of the oversold rebound in April is now behind us, with the S&P 500 up +14.5% from the absolute crash low on April 7. Recent weeks have been marked by sharp swings and high volatility, with the S&P 500 advancing +8% just over the past week. Now, earnings season is kicking off, with a focus on Microsoft and Meta reporting on Wednesday, followed by Amazon and Apple on Thursday.
In terms of positioning, market participants remain highly skeptical towards U.S. equities, especially stocks within the “Magnificent Seven.” On top of that, we have seen a significant improvement in market breadth over the past few weeks. This lays a solid foundation for a potential summer rally in U.S. markets, but the question is whether it might still be too early for such a move to start already in early April. We know that, seasonally, May and June tend to be among the weaker months of the year, and after three weeks of aggressive market rebounds, there could be renewed downside risk in the near term.
The trading pattern of the S&P 500 shows roughly 190 days between major cycle lows. The next such low is expected around mid-May, and it’s not uncommon to see market weakness 1–2 weeks ahead of a cycle low. Meanwhile, since last summer, the S&P has also seen 66 trading days between shorter-term cycle highs before renewed weakness sets in — the next of these highs falls on April 29. Taken together, this suggests a renewed risk of pullbacks over the coming two weeks, but such weakness should present an opportunity to add to equity positions ahead of potential summer strength!
S&P 500 (in USD) with 190 Days Between Major Cycle Lows
S&P 500 (in USD) with 66 Days Between Short-Term Cycle Tops
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