NEW YORK (Reuters) – A rebound in U.S. stocks is gaining confidence among investors studying market trends and raising hopes for stocks in the second half of 2022.
FILE PHOTO: Raindrops hang from a Wall Street sign in front of the New York Stock Exchange in Manhattan in New York City, New York, U.S. October 26, 2020. REUTERS/Mike Seger
After the worst first half since 1970, the S&P 500 has gained about 15% since mid-June, buoyed by stronger-than-expected corporate earnings and hopes the economy could survive a recession even if the Federal Reserve were to hike interest rates. Inflation.
The rally in equities so far this year has been short-lived and many market participants believe it is too early for optimism. Federal Reserve officials have been doing their best to stress that the central bank has work to do to contain inflation, and they will have to backtrack on monetary policy again at next week’s symposium in Jackson Hole, Wyoming monetary expectations. The political pivot, a story that helped lift stocks.
The S&P 500 closed up nearly 1.29% on Friday, posting four straight weeks of gains.
Still, those who pay attention to market events such as breadth, momentum and trading patterns to inform their investment decisions are seeing a more optimistic picture and are increasingly convinced that recent gains in equities are likely to fade. Not there.
“Indeed, many indicators are suggesting that the low we had in June is certainly more durable than the May or March lows,” said Willie Delwich, investment strategist at market research firm All Star Charts. “It’s a rally that bends and doesn’t need to be intimidated at this point.”
These include metrics that show the “breadth” of market movements, or whether a significant portion of a stock is rising or falling at one time. A period of tightening late last year was a worrying sign for some investors and preceded the start of a decline in the S&P 500, which saw the stock fall nearly 21% in the first half of 2022.
This trend has recently reversed. The number of new highs on the New York Stock Exchange and Nasdaq on a weekly basis last week broke new lows for the first time this year – an encouraging sign for Delwich and other strategists.
“Persistent rallies usually start with a large portion of stocks,” said Ed Clisold, chief US strategist at Ned Davis Research. The company recently raised its recommended exposure to US equities to neutral from underweight as some indicators turned positive.
Additionally, the number of S&P 500 stocks has recently surged 90% above its 50-day moving average. Data from Bespoke Investment Group shows the signal precedes major moves in the S&P 500, with the index gaining an average of 18.3% in the year after the index hit the 90% mark.
“With this brightness, we’re very likely to have a yearly high,” said Todd Sohn, Stratagas technical strategist.
A market that is more galloping also maintains its momentum. Delwich said the S&P 500 gained 15% or more in 40 trading days, followed by another 15.3% average gain over the next year.
A key technical indicator was reached earlier this month when the S&P 500 posted a 50% drop in its bear market cap. According to Sam Stovall, chief investment strategist at CFRA Research, the index has not made a new low since World War II following such a move.
Some indicators do not support overbought. Analysts from BofA Global Research said that historically the stock has bottomed when the sum of inflation and previous price/earnings is less than 20. That number currently stands at 28.5, the bank wrote on Wednesday.
At the same time, according to Strategus Sohn, the US Treasury yield curve is typically steeper at the bottom of the market. However, the current shape of the curve shows yields for short-dated bonds versus many longer-dated bonds, a sign that predated the last recession. (Contact)
Citi Strategists wrote earlier this week, “We would say it is reasonable to sell on continued strength considering the S&P 500 is already up above its year-end target of 4,200.
In fact, the S&P 500’s last three jumps this year have led to fresh falls in the index.
But All Star Charts’ Delwich thinks the move could be different.
“It’s more likely that we’ll see strength growing into strength,” he said.
Reporting by Lewis Kraskoff in New York Editing by Ira Iosbashvili and Matthew Lewis