Stock market bulls target technical signal for further gains

Some stock bulls are watching a technical indicator for whether a summer rebound in US equities will continue.

The S&P 500 is up 15% from its mid-June low, a rally that gathered further momentum after US inflation data on Wednesday showed consumer prices were unchanged in July. This bolstered the case for the Federal Reserve to end its market-killing rate hikes sooner than expected.

The surge in stocks, which delivered the S&P’s best eight-week period in more than a year, brought the index into view of a 50% retracement of its loss in the bear market.

Traders are watching the 4,231 level for the S&P 500. Reaching this would mean the benchmark will have recouped half of the losses recorded since falling from its January high.

“In my studies, pulling back 50% is bullish,” said Nargis Motorwala, an independent trader based in the San Francisco Bay Area.

But the lack of a decent pullback for the S&P 500 in recent weeks warrants treating the signal with caution, she said.

To trigger the signal, the S&P 500 must close above 4,231, Jonathan Krinsky, chief market technician at BTIG, said in a note.

While this doesn’t promise more gains, it could mean the bear market has bottomed out if history is any guide.

“Since WWII, every time the S&P has recovered 50% of the bear market price decline, while the 500 may have retested the previous low, it has never set a lower,” said Sam Stovall, chief investment strategist at CFRA Research.

A close above this level does not necessarily signal the end of short-term weakness in equities.

“The prior 50% retracements in 1974, 2004 and 2009 all had decent shakes shortly after crossing that threshold,” Krinsky said.

Stocks’ big run-up in recent weeks, particularly for battered tech and other growth names, lifted the Nasdaq Composite more than 20% above its recent low, raising hopes for a brief bear market.

Opinions differ on how to spot an expiring bear market or a new bull market. Some define a bull market as a 20% rise from a previous low. Others say investors can only be sure of a new bull market once an all-time high has been reached.

Fierce stock market rallies can occur in a broader bear market.

For example, the 2000-2002 bear market for the Nasdaq saw several rallies above 20%: all but one faded to make way for lower lows for the index.

Stock bulls, however, have something else to celebrate.

The strong rally in the U.S. stock market crushed measures of investor anxiety to multi-month lows, as the Cboe Volatility Index recorded its first close below the 20 level in nearly 4 months on Wednesday.

The VIX, an options-based indicator that reflects the stock market’s demand for downside protection, recently settled just above the 20 mark, a level typically associated with moderate investor concern about the outlook. short term.

The decline in the VIX coincides with a marked decline in daily stock market fluctuations over the past few weeks and therefore bodes well for the market.

Since 1990, on average, the S&P 500 has gained 0.11% each day the VIX closed below the 20 level, compared to an average decline of 0.08% on days the index closed above the mark of 20, according to an analysis by Reuters. .

Be smart with your money. Get the latest investing news straight to your inbox three times a week, with the Globe Investor newsletter. register today.

Leave a Comment

Your email address will not be published.