This week is off to a great start.

Major indexes such as the S&P 500 closed at the highest levels in more than a year.

Since its October lows, the broad market index is up over 21%.

Nasdaq, a tech-focused index, is at its highest level in 14 months.

What’s going on?

And, more importantly, what’s next for the markets?

Which Sectors Are Leading the Rally?

First, not all stocks are advancing at the same pace.

Companies in the tech sector are leading this trend. Software and semiconductors are up 19% and 33% over the past year, respectively.

Some stocks are up even more. NVIDIA, which makes the chips that power artificial intelligence systems, is up 170% since the beginning of this year.

Apple, which has just introduced its first augmented reality (or AR) headset, is up 42% in 2023.

On the other hand, oil stocks have been lagging. The Energy Select Sector SPDR Fund (XLE) is down 7% since the beginning of the year.

OPEC’s recently announced production cuts didn’t help lift the price of oil, which reflects in the sector’s performance.

In other words, not every sector has taken part in the rally. Tech is in a good place, while oil and gas are not.

What’s Next?

Investors are looking forward to two events this week.

The first one will be the release of May inflation data by the United States Bureau of Labor Statistics.

Analysts say that the market expects inflation to continue cooling down. If inflation did soften in May, it would mark the 11th consecutive month of decline.

If it happens, markets will breathe a sigh of relief. Lower inflation numbers will suggest that the Fed could slow down, pause, or even reverse its tightening policy.

The Fed’s interest rate decision is another massive event coming soon.

Economists predict that the Fed will pause interest rate increases for the first time in 15 months.

If that’s the case, the markets will have two powerful tailwinds to support equity prices.

Smart Money Is Positioning for a Rally

Hedge funds are becoming optimistic about this market.

JPMorgan has reported that their trading patterns suggest that they are not as afraid of a potential recession as they were in the past.

They bet on stocks that do well in more optimistic scenarios, such as consumer discretionary and commodity producers.

In addition to building positions in cyclical stocks, hedge funds are unwinding their “short” positions.

It’s another vote of confidence in this rally from some of the most sophisticated traders and investors out there.

Their risk appetite at this point is at a 12-month high.

Of course, you should take this information with a grain of salt.

After all, hedge fund managers are also wrong sometimes.

However, there is a significant change in the market mood. The market is becoming much more optimistic, and for good reasons.

The worst of the interest rate hiking saga seems to be over. The global economy is generally in good shape, and the much-feared global recession may not happen after all.

In other words, good news.

Thank you for your loyal readership,

The Financial Star team