Stocks’ summer rally may mean the worst of the bear market is over, but still, chart-watching strategists say another big downdraft is possible in September. Some strategists, in fact, say that from a technical point of view, the market may already have launched a new bull cycle. Others disagree, saying they need more confirmation of other signals. But everyone notes 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 have already entered a bull market, but warns fundamentals could be derailed. the bullish stance of the market. 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 an average of 1.8 months. Two months have passed since the low in mid-June. He noted that as of Monday, about 89% of common stocks were above the intermediate moving average, but that number was more than 90% for S&P 500 stocks. The 50-day moving average is simply the average of the last 50 closing prices of a stock or index. A close above would be a sign of positive momentum. “One way to think about it is if this is a bull market that you only know in hindsight, this is how it should be, and technicals almost always tell you before fundamentals and macros,” Clissold said. “I’m not ruling out macroeconomic concerns about the Fed’s tightening cycle or earnings slowdown. Those are real concerns.” Spotting Midpoints for Stocks Stocks have been buoyed by positive momentum since bottoming out in June. Strategists now say that it looks like it may have been the bottom of the bear market based on technical signals. The S&P 500 has been on the rise for four straight weeks, with the broad market index ending Monday about 18% above its June low. The market has made positive steps during the rally. For one thing, the S&P 500 closed Friday above 4231, the 50% retracement or the midpoint between its peak and its trough. BTIG says that has historically meant the index should not set a new low in the current cycle. Strategists say that is just a sign, and by itself it does not indicate that a bull market has started. “You’re 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 these signs of positive momentum. It’s really great short-term momentum and favorable signs for the next 12 months, but tactically I’d wonder how much fuel was in the tank.” He said a move to the downside could take the S&P 500 to around 4,000 in the September period. ‘The demarcation between bull and bear’ The next big hurdle for stocks could be that 200-day moving average level in the S&P 500, which came in at 4,327 on Monday. “That could be within a day,” Sohn said. The S&P 500 closed Monday at 4,297.14. “The 200-day moving average, to us, is always the demarcation between bullish and bearish, very simply as far as a popular and common way of looking at these moves,” said Ari Wald, head of technical analysis at Oppenheimer. Wald said that level will be key for the S&P 500 to break through, but he too is watching the 200-day level in individual stocks for a bull market signal. “The final signal doesn’t come until 70% of the shares are over their 200 days,” he said. As of Monday, that number for the New York Stock Exchange universe he watches was 38%. “The sentiment pendulum has swung back and forth. I still think a lot of those bears have to capitulate,” Wald said. He expects the stock to see a pullback in the September to early October time frame, before a rally in the fourth quarter. That would follow the pattern of mid-term election years, in which the market is typically higher in the last quarter of the year. “Just because the market may pull back in September doesn’t mean this isn’t a bull market,” said Clissold of Ned Davis Research. He said short-term sentiment indicators showed more optimism among investors. “There is some optimism that has returned to the market,” Clissold added. “A pullback that could alleviate some of the optimism could be healthy for the medium term.” Strategas’ Sohn said stocks that have seen big gains recently could be especially vulnerable even now. “I think it makes sense to remove some of those mean-reversing names, cryptocurrencies and unprofitable tech-type names. I wouldn’t want to stay too long after their welcome, as they had a good rebound,” he said. Sohn pointed to the big move higher in names like DraftKings, which started in July at about $12 a share and closed Monday at $20.80. The Ark Innovation ETF, a high-growth symbol, is up 30% since early July but is still close to 45% for the year. “These were summer rentals,” he said. “It’s time to move in.”
The summer rally has been very bullish, but strategists say a big sell-off is possible next month.
