Wednesday, July 20, 2022
As the bear market continues on, investors are anxiously awaiting an answer to the most critical question: is it over? It isn’t unreasonable to ask, as the S&P 500 is actually higher by about 6% since June 16 despite a significant amount of bad news during that time. This is good news because it follows some real capitulation that we saw in June, as we discussed at the time.
The next stage we would like to see would be some real signs of investor enthusiasm for buying stocks. For the most part over the past month, the data there has been lackluster. The best performing areas of the market have been oversold growth sectors, such as discretionary and technology, but defensives are close behind and cyclical value has been flat to lower over the time. In fact, 25% of stocks in the S&P 500 are actually lower than they were a month ago, and the percent of stocks up above their respective 200-day moving average has only nudged up slightly, from 13% then to 18% as of Monday. Not exactly impressive.
However, over the past few days we are seeing some signs of life from breadth.
“Tuesday was the best day for breadth on the NYSE since January 4, 2019,” reported LPL Financial Technical Market Strategist Scott Brown. “While breadth has been rather unimpressive during the market’s rally since the June lows, days like Tuesday are exactly what we are looking for, and can go a long way towards changing the character of this market.”
The Tuesday reading saw advancers outnumber decliners by more than 14:1 on the NYSE, and that comes on the heels of a nearly 8:1 reading on Friday, which at the time was the best reading since May of this year. Data on the S&P 500 was similar, with 98% of stocks advancing, the most since December 26, 2018, the first trading day after the market bottom that occurred on December 24, 2018.
To be clear, the S&P 500 is not out of the woods yet. As shown in our Chart of the Day, the strong advance on Tuesday finally pushed the index to a close above the 50-day moving average for the first time since April 20, but it remained just short of the late-June intraday highs.
The real test for the S&P 500 will come in the range just below 4200, which represents arguably the major breakdown point for the index. In our view, support levels like this become resistance once they break down and we saw a textbook example of this in May when the index reversed higher, only to be rejected at that level.
This is clearly an area where sellers have overwhelmed buyers this year, so if it is to be eclipsed we think it will take strong momentum and continued broad-based buying of equities in the days leading up to it. The trend is still firmly against stocks this year, and the onus is still on the bulls, but we are happy to report a clear positive and will continue to monitor for further signs of strength that could signal a major market low.
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