Investors have been fooled before. Why this stock market rally feels like the real thing.
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The stock market has been rallying this week. This one, unlike other attempts at a bounce, has a decent chance of lasting.
The S&P 500 has gained 6% since Friday afternoon, when the index hit its lowest intraday level of the year. Helping drive the gains this week has been the expectation that the Federal Reserve won’t become any more aggressive on its plan to lift interest rates. The central bank is trying to reign in high inflation by raising short-term rates, which is meant to curb economic demand. But Wednesday’s Fed minutes revealed that the Fed might not implement any more rate hikes than the ones currently planned. In fact, the minutes implied that rate hikes could slow down at some point soon, as economic growth has already begun to slow.
Rallies like this one have been short-lived this year. A late March rally brought the S&P 500 to just over the 4600 level. It dropped from there, and each subsequent rally brought the index to lower levels.
But there are plenty of reasons—10 according to Instinet’s chief market technician Frank Cappelleri—to believe that this most recent rally will last.
Reason #1: The S&P 500 had its “fourth straight good close.” Wednesday marked the fourth straight trading day when the index closed above its midpoint for the day, writes Cappelleri. That’s far better than the late-day selloffs the stock market had been having in recent weeks.
Reason #2: The New York Stock Exchange’s “TICK” hit its highest level in just over a year on Wednesday. The TICK index shows the number of stocks on the New York Stock Exchange exchange that has moved higher for a short period minus those that have fallen. The TICK hit 1,822, a level that often leads to more upside.
Reason #3: The S&P 500 is at a level that should give it some support, given the index’s loss this year. Technical analysts look for areas of “support” and “resistance” on their charts as they try to figure out where the market may go next. Simply put, as long as support holds, declines are unlikely to get much worse from here.
Reason #4: The S&P 500 currently shows a “DeMark Buy Signal.” That’s a fancy technical indicator that takes into account recent intraday highs and lows on the index. Believe me, it’s a good thing.
Reason #5: The S&P 500 is above a key trend line. Basically, this month’s losses imply that the index could easily drop below 3950. It has recently popped above that level.
Reason #6: The market is building “bullish patterns.” The index’s recent jump, bringing it above key levels, shows that buyers may be coming back into the market—and remaining back in, Cappelleri says.
Reason #7: Fewer groups of stocks are making new lows. Only nine exchange-traded funds have made new lows this week, versus 24 last week and 96 the week before.
Reason #8: High yield bond prices are going up. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) gained 1.5% Wednesday for its largest gain in over
two years. That means investors are more confident in companies’ credit—and less worried about a recession.
Reason #9: The dollar has dropped from a multidecade high. The dollar’s steady rise this year has been bad news for stocks. The greenback’s recent drop from its 52-week high as the Dollar is a welcome sight.
Reason #10: The S&P 500 is holding its ground in the face of bad news. Snap ’s (SNAP) earnings warning initially caused the index to drop, but it has since recovered. That could indicate the market has already reflected much of the concerns about the economy and earnings.
Write to Jacob Sonenshine at [email protected]
