Mocked by Everyone, Stock Rally Sits at Cusp of a Chart Landmark

(Bloomberg) — It’s doomed, it’s a bear-market rally, a rebound that won’t last. All the mud thrown at equities over the last month may well turn out to be true. But it’s getting harder to brush aside the recovery in the S&P 500 as it hovers at a widely watched landmark in charts.

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Four straight days of losses were erased in seconds Wednesday after inflation data came in cooler than expected. The S&P 500 climbed 1.9% as of 12:50 p.m. in New York, surpassing the 4,177 level that marked the peak during its May-June rebound. Overcoming the hurdle would produce what chartists refer to as a “higher high,” supposedly a signal that more sustained gains are in store.

“We’ve been cautious all year,” said Jonathan Krinsky, chief market technician at BTIG. “Clearing June’s high on a closing basis would go a long way to suggesting the trend was shifting.”

Wednesday’s inflation data — the first time since early 2021 that the headline reading was lower than economist forecasts — prompted traders to quickly pare back bets on the amount of tightening that the Federal Reserve is likely to do, sparking a bounce across risky assets.

More than $5 trillion has been restored in equity values as the S&P 500 staged its strongest rebound this year, jumping 15% from its June trough. Stocks have rallied as better-than-expected earnings and economic data eased concern about an imminent economic recession.

“Stocks have been in rally mode, so if you’ve been buying all along, this will do nothing to dissuade you,” said Steve Sosnick, chief strategist at Interactive Brokers. “While traders are eager for anything that can be interpreted as an all clear, it’s one report,” he added. “But it fits with the newfound bullish narrative.”

Along the way, warnings from strategists at firms like Morgan Stanley and Goldman Sachs Group Inc. have been getting louder. In a client survey conducted last week by Wolfe Research during a webcast, 75% of the participants said the S&P 500 has yet to reach a bottom.

Underpinning the skepticism is the uncertain trajectory of the Fed’s hiking cycle and its impact on the economy. Already, gross domestic product contracted for two straight quarters. And major makers of computer chips warned about slowing demand.

“We’re not yet convinced that the upturn in stock prices we’ve seen is yet a firm trend,” said Lisa Erickson, senior vice president and head of public markets group at US Bank Wealth Management. “Price pressures while they’ve come down in the recent CPI report still have a way to go. And the Fed also wants to see clear and convincing evidence for it to really change its monetary policy approach.”

But the equity resilience has continued. One by one, what used to be resistance in price charts turned into support, and bears were forced to unwind their positions. A Goldman basket of most-shorted stocks has soared 30% since the start of July, burning anyone wagering on share declines.

This month, the June peak has become a battle line between bulls and bears. The index briefly topped that threshold on Monday, only to close below it as selling resumed and stocks wiped out their intraday gains.

“Breaching the 4,177 level on the S&P 500 is important from a trend following perspective because it starts to establish a sequence of higher highs and higher lows, or what is more affectionately known as an uptrend,” Renaissance Macro Research co-founder Jeff deGraaf, wrote in a note last week. He was ranked as the top technical analyst in Institutional Investor’s annual survey for 11 straight years through 2015.

Sam Stovall, chief investment strategist at CFRA, is not ready to call all clear until the S&P 500 recoups half its losses that incurred from January through June. To adherents of Fibonacci analysis, a technical tool based on a number sequence described by Leonardo of Pisa in “Liber Abaci” in 1202, reaching the midpoint is a signal that the market is poised to make a full recovery.

“This remains a bear market rally until we close above the 4,232 level on the S&P,” Stovall said. “After that, history reminds us that no bear market ever recovered 50% of its decline only to set an even lower low. It would be an early signal that the bear is behind us.”

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