The summer rally in equities may mean the worst of the bear market is over, but even so, chart-watching strategists say another big downtrend is possible in September. Some strategists, in fact, say that from a technical perspective, the market may have already entered a new bull cycle. Others disagree, saying they need more confirmation from other signals. But they all note that September is historically negative for the market – and it could be again. Looking at the 50-day moving average, Ed Clissold, chief US strategist at Ned Davis Research, said he saw technical signs that stocks may have already entered a bull market, but he warns that fundamentals could derail the market’s bullish stance. His work shows that by the time 90% of common stocks are above their 50-day moving average, the market has been in a bull cycle for a median of 1.8 months. It’s been two months since the mid-June low. He noted that as of Monday, about 89% of common stocks were above the middle moving average, but that number was over 90% for S&P 500 stocks. The 50-day moving average is simply the average of the last 50 closing prices of a share or an index. A close above would be a positive momentum signal. “One way to think about it is if it’s a bull market that you only know from hindsight, that’s how it should be, and the technicals almost always tell you before the fundamentals and macros,” Clissold said. “I don’t dismiss macro concerns about the Fed’s tightening cycle or slowing earnings. These are real worries.” Spotting stock waypoints Stocks have been buoyed by positive momentum since bottoming out in June. Strategists are now saying it looks like the bear market may have been down based on technical signals. The S&P 500 has been up for four straight weeks and the broad stock index ended Monday about 18% above its June low. The market made positive progress during the rally. For one, the S&P 500 closed Friday above 4,231, the 50% retracement or midpoint between its high and low. BTIG says this historically means the index is unlikely to hit a new low in the current cycle. Strategists say this is just a signal and by itself does not indicate that a bull market has started. “You are still below a downward sloping 200-day moving average,” said Todd Sohn, technical analyst at Strategas. “The broader trends haven’t changed as much as you got those positive momentum signals. It’s really great short-term momentum and favorable signals for the next 12 months, but tactically I would wonder how many gasoline there would be in the tank.” He said a move lower could take the S&P 500 to around 4,000 in the September period. “The line between bullish and bearish” The next big hurdle for stocks could be that 200-day moving average level on the S&P 500 – which stood at 4,327 on Monday. “It could be one day,” Sohn said. The S&P 500 ended Monday at 4,297.14. “The 200-day moving average, to us, is still the line between bullish and bearish, very simplistically in terms of a popular and common way to look at these moves,” said Ari Wald, head of technical analysis. at Oppenheimer. Wald said that level would be critical for the S&P 500 to break above, but he’s also watching the 200-day level on individual stocks for a bullish market signal. “The final signal only comes when 70% of the stocks exceed their 200 days,” he said. On Monday, this figure for the universe of the New York Stock Exchange that he monitors was 38%. “The sentiment pendulum has swung from the extremes. I still think a lot of these bears have to capitulate,” Wald said. He expects stocks to decline from September to early October, before a rally in the fourth quarter. This would follow the pattern of midterm election years, where the market is typically higher in the last quarter of the year. “Just because the market may pull back in September doesn’t mean it’s not a bull market,” said Clissold of Ned Davis Research. He said short-term sentiment indicators showed more optimism among investors. “There is a certain optimism that has returned to the market,” added Clissold. “A pullback that could relieve some of the optimism could be healthy in the medium term.” Strategas’ Sohn said stocks that have posted big gains recently could be particularly vulnerable even now. “I think it makes sense to prune some of these mean reverting names, cryptos and unprofitable tech type names. I wouldn’t want to extend your welcome too much because they’ve had a nice bounce back,” did he declare. Sohn pointed to the big upside move in names like DraftKings, which started July at around $12 a share and closed Monday at $20.80. The Ark Innovation ETF, a poster for high growth, is up about 30% since the start of July, but is still down nearly 45% for the year. “It was summer rentals,” he said. “It’s time to move.”
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