Off The Wire
Wall St Week Ahead-Summer rebound in U.S. stocks gains fans among chart-watching investors
“The beginning of sustainable rallies usually starts with a large percentage of stocks rallying together,” said Ed Clissold, chief U.S. strategist at Ned Davis Research. The firm recently increased its recommended exposure to U.S. equities to "neutral" from "underweight" as some indicators turned positive. Additionally, the number of S&P 500 stocks above their 50-day moving average recently hit 90%. The signal has preceded big moves in the S&P 500, with the index gaining an average of 18.3% in the year after the 90% threshold is hit, data from Bespoke Investment Group showed.
“The probability that we are higher in a year is much higher with that flashing,” said Todd Sohn, technical strategist at Strategas. A market that is galloping higher also tends to sustain its momentum. A rise of 15% or more in the S&P 500 within 40 trading days has been followed by an additional average gain of 15.3% over the next year, Delwiche said.
One important technical indicator was hit earlier this month, when the S&P 500 recovered 50% of its bear market price decline. Since World War Two, the index has not gone on to make a new low after such a move, according to Sam Stovall, chief investment strategist at CFRA Research. Some indicators do not support more gains. Analysts at BofA Global Research said that stocks have historically bottomed when the sum of inflation and trailing price/earnings was less than 20. That number currently stands at 28.5, the bank wrote on Wednesday. At the same time, the U.S. Treasury yield curve typically steepens around market bottoms, according to Strategas' Sohn. The current shape of the curve, however, shows yields for shorter-dated bonds exceeding those for many longer-dated ones, a sign that has preceded past recessions. (LINK) "We would say that tactically selling into further strength is justified," Citi strategists wrote earlier this week, noting that the S&P 500 had already rallied through their year-end target of 4,200. Indeed, three previous bounces in the S&P 500 this year have reversed to result in the index marking new lows. But Delwiche, of All Star Charts, believes this move may be different. "It’s more likely that we see strength beget strength," he said. (Reporting by Lewis Krauskopf in New York Editing by Ira Iosebashvili and Matthew Lewis)Messaging: firstname.lastname@example.org, Twitter: @LKrauskopf))
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