The Fading Resistance to the New Bull Market

Lou Basenese

Thursday, August 18, 2022

Last week, I spent time on Fox Business arguing with my peers…

We were arguing about whether or not the new bull market for tech stocks is sustainable.

Given rising interest rates and slowing economic growth, they’re resistant to embrace optimism. Despite the fact that insider buying versus selling by tech executives recently hit a historic (bullish) imbalance. (For the record, I don’t know of a more bullish indicator than insider buying.)

Why am I bringing this up today? Because it turns out the S&P 500 Index is also bumping up against resistance…

From a technical perspective, not a pundit's perspective.

But if it breaks through, look for investor sentiment (and actions) to quickly flip bullish, which no one will complain about here.

Here’s why I’m convinced that’s precisely what’s going to happen…

Two Undeniably Bullish Technicals

As I write, the S&P 500 index is up 16.7% from the June low, putting it within spitting distance of a new bull market.

Of course, the doubters will argue that a handful of stocks, particularly Apple Inc. (AAPL), account for the majority of the move. So the rebound should be taken with a grain of salt.

Fair point. But if we look past the headline gains and dig into the details, the underlying technicals of the S&P 500’s latest move all support the bull case.

Consider:

  • Last week, the S&P 500 broke above the key 50% retracement level of 4,231 for the first time since May. That means the index regained half of its losses, after hitting an all-time high in January. And as BTIG’s Jonathan Krinsky noted, “Since 1950 there has never been a bear market rally that exceeded the 50% retracement and then gone on to make new cycle lows.” In other words, the bottom was put in for the S&P 500 in June.
  • The percentage of individual stocks in the index trading above the key technical 50-day moving average recently skyrocketed to 91.25%, the highest mark in over a year. The significance? Once again, it’s history. As Bespoke Investment Group noted, “Historically, breadth thrusts of this magnitude have been springboards for further gains in the year ahead rather than short-term rallies that fizzle.” In other words, it signifies the start of a new bull market, not a headfake in the midst of a protracted bear market decline. More specifically, 15 of the last 16 times the S&P experienced bullish short-term breadth, stocks were higher a year later… by an average of 18.34%.

Even against this undeniable bullish technical backdrop and history, bears remain.

Take Morgan Stanley’s Michael Wilson who said: “The macro, policy, and earnings set-up is much less favorable for equities today.”

Even I won’t argue against that fundamental rationale. But, remember, the stock market is a forward-looking beast. And based on the latest price action, it’s clearly looking past these obvious headwinds.

So what’s it going to take for everyone to follow suit?

The Last Holdout

From a fundamental perspective, it’s going to take the Fed halting interest rate hikes before the staunchest bears change their opinion. That’s not happening anytime soon.

From a technical perspective, though, we could be within spitting distance of another undeniably bullish technical.

I’m talking about the 200-day moving average.

Investors and traders consider definitive price moves above or below this critical level an indication of a new bullish or bearish trend.

Sure enough, in recent days, the S&P 500 index continued its climb from the recent lows and touched the 200-day moving average, which has everyone talking about it.

Why? Because if the index fails to maintain this break through resistance, the bears insist the chart looks eerily familiar to the 2008 pattern, which could mean (way) more losses are dead ahead.

Candidly, I don’t believe the test of the 200-day moving average is that dire, as corporate balance sheets and global economic conditions (i.e. the fundamentals) remain way better than 2008. Nevertheless, too many traders and bears are paying close attention to it for us to ignore.

Based on the underlying technicals, however, I’m convinced they’ll be forced to come over to the bullish side in short order.

All the more so when I consider that the market segments that broke down first – I’m talking about biotech, semiconductors, and small caps – have already come roaring back.

So we’re overdue for the major market index to do the same.

Ahead of the tape,

Tags: sp-500 stocks

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