With stocks’ summer rally seemingly on hold as investors wait to hear from Federal Reserve Chairman Jerome Powell on Friday, a technical strategist has compiled a list of “pros and cons” that could help investors clarify their thinking about the direction the market is taking. Next.
John Kosar, chief market strategist at Asbury Research, said his firm’s quantitative model for stocks suggests that the “tactical” or short-term uptrend in the S&P 500 SPX,
still has room to run.
However, Asbury Research ultimately expects the selling to continue over the longer term as the bearish trend in stocks that began in January remains intact, although tested by the summer rally, according to a Tuesday note. to customers.
According to Kosar, it would take Wall Street’s “fear gauge”, the Cboe volatility index, VIX,
making a sustained rally above 24 to indicate that this week’s equity pullback has legs. Until that happens, Kosar said there are still compelling metrics, including investor sentiment, market breadth and others, suggesting stocks won’t immediately return to June lows.
See: The Dow typically crashes in September. Why is one of the market’s unsolved mysteries
But there are other factors, including investor positioning and seasonality, that suggest the recent pullback could continue.
Kosar breaks them down into “tactical” factors, or those likely to happen in the coming weeks, and others that are “strategic,” likely to happen in the months ahead.
More details on each of these factors can be found below:
- Price and trend (short-term bullish, medium-term bearish): Despite the steep decline that began late last week, the S&P 500 is still in a minor tactical uptrend. This trend will remain intact until the S&P 500 breaks back below 3,946, according to Kosar.
Movement of influential stocks (short-term bullish, medium-term bearish): Like the S&P 500, Amazon.com Inc., AMZN,
the fourth largest US stock by market capitalization, recently bounced off a significant resistance level (in both cases the resistance was the 200-day moving average). Whether Amazon breaks through this resistance level or goes down first could have major implications for Amazon’s stock, as well as the broader market.
- Market internals pointing up (short-term bullish): Asbury’s “A6” model of market insiders remains biased toward further gains for equities. This model is based on six factors: the rate of change of the S&P 500, the relative performance of equities and high yield bonds, asset flows into equities and US equity funds, bond spreads company, volume of transactions and scope of the market.
- Volatility (short-term bullish): As mentioned earlier, Asbury views a VIX of at least 24 as the fine line between a tactical buying opportunity in the S&P 500 and a sustained market decline. The VIX was pegged at 23.67 on Tuesday, up almost 15% on the week so far.
Asset Flow (short-term bullish): Unlike most of the previous factors, this one is based on the Nasdaq-100 via the Invesco QQQ QQQ exchange-traded fund,
According to Asbury, the net assets paid into the popular exchange-traded fund have been above their 21-day moving average since July 6. It would take a drop in these assets below their 21-day moving average to suggest that the index’s recent decline has legs.
- Overbought vs oversold (short-term bearish): The S&P 500 appears to be moving away from what Kosar described as “overbought monthly extremes.” Similar patterns have emerged during the last three minor market tops that have occurred since December. Could it be the fourth?
- Market Range (Medium Term Bullish): The percentage of New York Stock Exchange stocks trading above their 200-day moving average is back above 40% from a short-term low of just 18% since July 1. The strong market breadth bodes well for stocks, Kosar said.
- Strategic price momentum (mid-term bullish): The S&P 500’s 13-week rate of change climbed back above the zero line on August 5. But this line is currently being tested. If this holds, it could indicate that the market will not return to June lows soon.
- Seasonality (short-term bearish, medium-term bullish): Historical market data shows that the first two weeks of July are generally the strongest two weeks of the entire third quarter for the S&P 500, based on data since 1957. Following this, the index often weakens gradually as September approaches.
- Growth vs. Value (Short Term Bullish): Simply put, growth stocks that are also members of the S&P 500 have outperformed value stocks in the S&P 500 since the start of the market’s recent uptrend. This indicates an improvement in risk appetite, which generally bodes well for equities.
Granted, technical analysis can be more of an art than a science, and there is plenty of room for disagreement. Professor Jeff Bierman, chief market technician at TheoTrade, said the market gave a rare bearish signal on Friday when three popular technical indicators – the Moving Average Convergence-Divergence Gauge, the Relative Strength Index and the Oscillator Slow Stochastic – all issued bearish signals simultaneously.
On Tuesday, the Dow Jones Industrial Average DJIA,
was on track for a third day of declines, although the S&P 500 was roughly flat and the Nasdaq Composite COMP,
was up 0.2% at last check. All three indexes posted their biggest daily decline in two months on Monday.