Stock market bulls target technical signal for further gains

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NEW YORK – 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.

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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.

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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.

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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. .

(Reporting by Saqib Iqbal Ahmed; editing by Megan Davies and Richard Chang)



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