Traders prefer volatile marketand they got one in 2022. Stocks fell, gathered together, and fell again, driven by ever-changing expectations for interest rates and inflation, shifting odds of a recession and the outlook for corporate earnings. Pretty much the only thing that was reliable was the specs.
Yes, the technical ones. Last week’s rally lifted
index 3.6%. That’s after all three fell at least 3% in the previous week, their third consecutive losing week.
What stands out is where last week’s rally began — when the S&P 500 hit 3,900 on Tuesday. This is not only a big round number, but also equal to the 61.8% Fibonacci retracement level of the June lows (that is, 61.8% of the way from the bottom of the market to its previous peak). That the index even had to bounce back was because it had fallen 9% from its 200-day moving average near 4,300, where the stock had stalled after a 17% rally from its mid-June low just above 3,600 .The oft-maligned graphics fit like a glove.
So where is the S&P 500 headed next? Many technical analysts see a trading range from 3900 to 4300 most likely in the near future. A break below 3900 would put 3800 as the next support level, then the June low of 3636 comes into play. However, a rise above 4,300 could signal fresh gains and a change in market tone, JP Morgan technical strategist Jason Hunter wrote.
That’s a big if. Keith Lerner, Truist Advisory Services co-chief investment officer and licensed market technician, expects a sustained stabilization in the very near term, given the magnitude of the previous weeks’ declines, depressed sentiment and the recent selloff that has left portfolio managers light on stocks.
But in the coming months, he recommends reducing holdings when the S&P 500 approaches its resistance level of 4,300, still close to where the index’s 200-day moving average sits. This is also where the S&P 500 will trade at 18 times price/earnings, which is the peak in recent months.
“I think it’s somewhat optimistic to say we’ll be back up there soon,” Lerner says. “That’s a really strong cap right now given the amount of earnings uncertainty you have.”
Analysts’ estimates of S&P 500 third-quarter earnings have fallen 5.5% since mid-June, according to Credit Suisse data, despite a better-than-expected second-quarter reporting season. Forecasts for 2023 are holding up better, down 3.7% since mid-June, but there are reasons to believe they will decline further. The Federal Reserve’s big interest rate hikes in June, July and September will begin to feed into the real economy in the coming quarters, a US recession remains possibleand economic weakness in Europe and China will hurt multinationals’ profits.
Faced with all the uncertainty in the outlook, analysts may not be updating their 2023 forecasts just yet, instead focusing on the here and now of the third quarter. If those forecasts fall further, the top of the S&P 500’s trading range could also fall.
For now, though, specs are likely to continue to dominate. The next major catalyst for the market will land on Tuesday morning, with the release of the consumer price index for August. A cool rate of inflation could cause stocks to rise to meet resistance, while hotter press could cause them to break through support.
Either way, it’s a merchant’s market. The rest of us just invest in it.
Write to Nicholas Jasinski c [email protected]