Some stock market bulls are watching a technical indicator for clues as to whether the summer bounce in US stocks will continue.
The S&P 500 rose 15% from its mid-June low, a rally that gained further momentum after US inflation data on Wednesday showed consumer prices were unchanged for July. This reinforced the case for the Federal Reserve to end the bruising rate hike in the market sooner than previously expected.
A rally in stocks, which provided the S&P’s best eight-week period in more than a year, put the index within sight of a 50% correction of its bear market loss.
Traders are watching the 4231 level for the S&P 500 Index. This will mean that the benchmark index will recover half of the losses recorded since the decline from its January high.
“In my studies, getting 50% is considered optimistic,” said Nargis Motorwala, an independent trader in the San Francisco Bay Area.
But the lack of a proper S&P 500 pullback in recent weeks makes it worth treating the signal with caution, she said.
Jonathan Krinsky, chief market technician at BTIG, said in a note to launch the S&P 500 signal to close above 4231.
While this does not promise further gains, it could mean that the bear market has bottomed if history is any guide.
“Since World War II, every time the S&P has recovered 50% of its bear market price decline, while the 500 has retested the previous decline, it has not set a lower low,” said Sam Stovall, chief investment analyst at CFRA Research. .
Closing above this level does not necessarily mean the end of weakness in the near term for stocks.
“Previous 50 percent recoveries in 1974, 2004 and 2009 had good shakes soon after this threshold was crossed,” Krinsky said.
The big advance in stocks in recent weeks, especially for shaky technology and other growth names, has lifted the Nasdaq Composite Index more than 20% above its recent low, raising hopes of a short bear market.
Opinions differ on how to spot an expiring bear market or a new bull market. Some define a bull market as a 20% rise from a previous low. Others say that investors can only be sure of a new bull market once a record high is reached.
Stock rebounds can occur within a broader bear market.
For example, the 2000-2002 bear market of the Nasdaq saw several highs of over 20%: all but one faded to make way for lower bottoms for the index.
However, the stock market bulls have something else to celebrate.
A strong rally in the US stock market crushed measures of investor anxiety to multi-month lows, with Cboe’s volatility index on Wednesday hitting its first close below 20 in nearly 4 months.
The VIX, an options-based index that reflects demand for protection against declines in the stock market, recently stood above the 20 mark, a level generally associated with moderate investor concern about the near-term outlook.
The downturn in VIX coincides with a marked decrease in daily stock market volatility over the past few weeks, and therefore bodes well for the market.
Since 1990, on average, the S&P 500 has gained 0.11% on any day the VIX has closed below 20, compared to an average decline of 0.08% for those days when the index closed above the 20 mark, according to a Reuters analysis. .
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