The summer rally in stocks may mean the worst of the bear market is over, yet chart-watching strategists say a major downdraft is possible in September. Some strategists are even saying that from a technical standpoint, the market could 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 sees technical signs that stocks may already have entered a bull market, but warns that fundamentals could derail bullish market position. His work shows that by the time 90% of common stocks are above their 50-day moving average, the market has already 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 intermediate 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 for a stock or index. A close above it would be a positive momentum signal. “One way to think about it is if this is a bull market that you only know afterwards, this is how it should go, and the technicals almost always tell you before the fundamentals and the macros,” Clissold said. “I’m not dismissing macro concerns about the Fed’s tightening cycle or the earnings slowdown. Those are real concerns.” Spotting Stock Waypoints Stocks are supported by positive momentum since bottoming out in June. Strategists now say it appears that the bear market was low on technical signals. The S&P 500 has been higher for four straight weeks and the broad market index ended Monday about 18% above its June low. The market has made positive progress during the rally. First, the S&P 500 closed Friday above 4.231, the 50% retracement or the halfway point between peak and trough. BTIG says that historically has meant that the index should not hit another low in the current cycle. Strategists say this is just one signal, and it alone does not indicate a bull market has begun. “You’re still below a downward descending 200-day moving average,” said Todd Sohn, technical analyst at Strategas. “The broader trends haven’t changed that much once you’ve gotten these positive momentum signals. It’s really great short-term momentum and favorable signals for the next 12 months, but tactically I’d be wondering how much gas would be in the tank.” He said that a downward move could bring the S&P 500 to about 4,000 in the September period. ‘The Bull-Bear Demarcation’ The next big hurdle for stocks could be that 200-day moving average on the S&P 500 – which stood at 4,327 Monday. “That could be in a day,” Sohn said. The S&P 500 ended Monday at 4,297.14 points. “The 200-day moving average has always been the bull-bear demarcation for us, very simplistic insofar as it’s a popular and common way to look at these moves,” said Ari Wald, Oppenheimer’s chief of technical analysis. Wald said this level will be key to surpassing the S&P 500, but he also watches the 200-day level on individual stocks for a bull market signal. “The final signal will not come until 70% of the stock is above 200 days,” he said. On Monday, that number stood at 38% for the New York Stock Exchange universe he watches. “The sentiment swing went from extremes. I still think a lot of those bears have to capitulate,” Wald said. He expects stocks to decline in the September to early October time frame before rallying in the fourth quarter. That 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 could pull back in September doesn’t mean this isn’t a bull market,” said Clissold of Ned Davis Research. He said near-term sentiment indicators were more bullish among investors. “There is some optimism that crept back into the market,” Clissold added. “A pullback that could alleviate some of the optimism could be healthy for the medium term.” Strategas’s Sohn said stocks that recently posted big gains could be especially vulnerable even now. “I think it makes sense to prune some of those vile names, the cryptos and tech-type unprofitable names. I wouldn’t want to let your welcome last too long because they had a nice bounce,” said he. Sohn pointed to the big move up in names like DraftKings, which started in July at about $12 a share and closed Monday at $20.80. The Ark Innovation ETF, a paragon of high growth, is up about 30% since the beginning of July, but is still down nearly 45% for the full year. “These were summer rentals,” he said. “It’s time to move.”
The summer rally has been very bullish, but strategists say a big sell-off next month is possible
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