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…
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.
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?
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,