Stocks’ summer rally could mean the worst of the bear market is over, but strategists watching the charts say another big drop is possible in September. In fact, some strategists say that technically the market may have entered a new bull cycle. Others disagree, saying they need more confirmation from other signals. But they all point out that September was historically negative for the market and could happen again. Ed Clissold, US chief strategist at Ned Davis Research, who watches the 50-day moving average, said he saw technical signs that stocks may already have entered a bull market, but warned that fundamentals could derail the market’s bullish stance. Their study shows that when 90% of 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 June’s low. He noted that as of Monday, about 89% of common stocks are above the medium moving average, but that number is more than 90% for S&P 500 stocks. The 50-day moving average is the average of the last 50 closing prices for a stock or index. A close above this would be a positive momentum signal. “One way to think about it is if it’s a bull market that you can only see afterward, that’s how it should go, and the techniques almost always tell you before the fundamentals and macros,” Clissold said. “I’m not ignoring macro concerns about the Fed’s tightening cycle or slowing earnings. These are real concerns.” Identifying breakpoints for equities Stocks have been bolstered by positive momentum since hitting their lowest level in June. Strategists are now saying that the bear market could be lower, according to technical signals. The S&P 500 rallied for the fourth straight week and the broad market index ended on Monday about 18% above its June low. The market made positive strides during the rally. First, the S&P 500 closed Friday above 4,231, above the 50% retracement or midpoint between the top and bottom. BTIG says that historically has meant that the index should not set a new low in the current cycle. Strategists say this is just a signal and by itself does not indicate the start of a bull market. “You’re still below the downward sloping 200-day moving average,” said Strategas technical analyst Todd Sohn. “Broad trends haven’t changed as much as you’re getting these positive momentum signals. That’s really great short-term momentum and positive signals for the next 12 months, but tactically I question how much gas will be in the tank.” The S&P 500 of a down move is in September He said he could take it to about 4,000. ‘The border between bull and bear’ The next big hurdle for stocks could be the 200-day moving average level on the S&P 500, which was 4,327 on Monday. “This may be a day away,” Sohn said. The S&P 500 finished at 4,297.14 on Monday. “For us, the 200-day moving average is always the border between bull and bear, very simply a popular and common way of looking at these movements,” said Ari Wald, head of technical analysis at Oppenheimer. Wald said the level will be key for the S&P 500 to pass, but he is also watching the 200-day level in individual stocks for a bull market signal. “The final signal doesn’t come until 70% of stocks are above their 200-day maturity,” he said. On Monday, that number was 38% for the New York Stock Exchange universe he watched. “The sentiment pendulum has gone to extremes. I still think most of these bears should have surrendered,” Wald said. He expects stocks to see a pullback in September to early October before a fourth-quarter rally. This will follow the pattern of mid-election years when the market is typically higher in the last quarter of the year. “Just because the market can 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 are showing more bullishness among investors. “There is optimism returning to the market,” Clissold added. “A pullback that may dampen some of the optimism may be healthy in the medium term.” Strategas’ Sohn said stocks that have seen big gains recently may be particularly vulnerable even now. “I think it makes sense to prune some of these malicious names, cryptos and non-profit tech-type names. I wouldn’t want to welcome you too much as they’ve made a nice splash,” he said. Sohn drew attention to the big moves in names like DraftKings, which started July at about $12 and closed at $20.80 on Monday. The poster child for high growth, the Ark Innovation ETF has risen nearly 30% since the beginning of July, but is still close to 45% for the year. “These were summer rentals,” he said. “It’s time to get out.”
The summer rally is pretty bullish, but strategists say a big sell-off is possible next month
