Stocks’ summer rally may signal the end of the worst of the bear market, but chart-watching strategists say another big drop could be possible in September. Some strategists, in fact, say that from a technical perspective, the market may already be entering a new bull period. Others disagree, saying they need more confirmation than other signals. But they all point out that September has historically been negative for the market and could be again. Watching the 50-day moving average, Ed Clissold, chief U.S. strategist at Ned Davis Research, said he sees technical signs that stocks may already be entering a bull market, but he warned that fundamentals could undermine the market’s bullish position. His work shows that 90% of common stocks are above their 50-day moving average, with the market in a bull cycle for a median of 1.8 months. In mid-June, two months have passed since the minimum. He noted that about 89% of common stocks were above their interim moving average on Monday, but that number was more than 90% for S&P 500 stocks. A 50-day moving average is simply the average of the last 50 closing prices for a stock or index. An approximation above this would be a positive impulse signal. “One way to think about it is, if it’s a bull market that you only know about in the background, it should be, and technical experts almost always tell you before the fundamentals and the macros,” Clissold said. “I’m not dismissing macro concerns about the Fed’s tightening cycle or falling yields. Those are real concerns.” Spotting Waypoints for Stocks Stocks have rallied with positive momentum since hitting June lows. Strategists are now saying that the bear market may be on the downside due to technical signals. The S&P 500 hit a four-week high, and the broad market index ended Monday nearly 18% above its June low. During the rally, the market made positive progress. First, the S&P 500 closed above 4,231 on Friday, the 50% retracement, or the midpoint between the peak and trough. Historically, the index has not been expected to set a new low in the current period, BTIG says. Strategists do not indicate that this is just a signal and that a bull market has started on its own. “You’re still below the bearish 200-day moving average,” said Todd Sohn, technical analyst at Strategas. “Broad trends haven’t changed as much as you’re getting these positive momentum signals. It’s a really big short-term momentum and a favorable signal for the next 12 months, but tactically I’d question how much gas is left in the tank.” said it could lead to about 4,000 in the September period. ‘Boundary between bulls and bears’ The next major hurdle for stocks could be the 200-day moving average in the S&P 500 – which was at 4,327 on Monday. “It could be a day later,” Sohn said. The S&P 500 ended Monday at 4,297.14. “The 200-day moving average is always the boundary between bulls and bears for us, very simply a popular and common way to look at these movements,” said Ari Wald, head of technical analysis at Oppenheimer. Wald said that level would be key for the S&P 500 to break through, but he’s also watching the 200-day level in individual stocks for a bull market signal. “The final signal doesn’t come until 70% of stocks are above the 200-day,” he said. For the New York Stock Exchange universe he tracks on Monday, that figure was 38%. “The sensitive pendulum has swung to the extreme. I still think a lot of those bears are going to have to give up,” Wald said. He expects stocks to see a pullback from September to early October before a fourth-quarter rally. This will follow the pattern of midterm election years, when the market is typically higher in the last quarter of the year. “Just because the market may pull back in September doesn’t mean it’s not a bull market,” said Clissold of Ned Davis Research. He said short-term sentiment indicators are showing more bullishness among investors. “There is some optimism coming back into the market,” Clissold added. “A pullback that could take away some of the optimism could be healthy for the medium term.” Strategas’ Sohn said stocks that have seen big gains recently could be particularly vulnerable now. “I think it makes sense to prune some of these throwback names, crypto and unprofitable tech-type names. I wouldn’t want to stay too long because they’re welcome, they’ve had a nice bounce,” he said. Sohn pointed to the big move higher in names like DraftKings, which started at about $12 a share in July and closed Monday at $20.80. The Ark Innovation ETF, the poster child for high growth, is up nearly 30% since early July, but is still down nearly 45% for the year. “These were summer rentals,” he said. “Time to move.”
The summer rally has been very bullish, but strategists say a big sell-off is possible next month
