More Stocks Are Taking Part in Bounceback Rally
A swath of stocks has participated in the market’s recent rebound, typically an encouraging sign of a rally’s durability.
Yet few investors are willing to call a market bottom, especially after such a punishing year.
The S&P 500 has risen 15% from its 2022 low in mid-June, with all 11 sectors of the benchmark climbing to start the third quarter. Dozens of stocks, from
BJ’s Wholesale Club Holdings Inc.
, set fresh 52-week highs last week.
Plus, a widely followed technical indicator for market breadth recently hit a key milestone. The share of S&P 500 stocks closing above their 50-day moving averages rose earlier this month to 93%—the highest level since the summer of 2020—and held above 90% for most of last week, according to FactSet and Dow Jones Market Data. In the past two decades, the benchmark has on average risen in the months and year after initially crossing the 90% threshold.
Market participants typically see a broad push higher as an indication that a rally has legs. When stocks across the market are rising, indexes are less vulnerable to a downturn if a few heavily weighted stocks fall.
“It’s without a doubt a healthier rally from a breadth perspective than the ones that preceded this, at least since the bear market began,” said Liz Ann Sonders, chief investment strategist of
“But I don’t think we can say with any confidence that the bottom in June was truly the start of a new bull market.”
Investors are still contending with the Federal Reserve’s campaign to raise interest rates to bring down inflation. And corporate earnings are expected to slow in the second half as recession fears loom.
Despite the recent rally, the S&P 500 is off 11% in 2022. Some of the market’s biggest stocks are down even more. Google parent
has dropped 19%;
has tumbled 17%; and
has fallen 16%.
In the week ahead, investors will look to earnings reports from the likes of
for clues about the health of the economy. They will also watch the release of the personal-consumption expenditures price index—the Fed’s preferred inflation gauge—and Fed Chair
speech at the central bank’s Jackson Hole, Wyo., summit, both on Friday.
The market’s ascent comes as corporate earnings have held up better than many feared, giving investors greater confidence to buy stocks. With 95% of S&P 500 companies having reported second-quarter results, three-quarters beat Wall Street profit expectations, according to FactSet. For the year, earnings are expected to rise about 8%, versus last year’s 47% increase.
On the inflation front, the July consumer-price reading showed prices moderating from elevated levels, leading some investors to believe the Fed will ease up on its rate-raising plan. Stocks have jumped since the softer inflation number, even as Fed officials have reiterated their intent to keep financial conditions tight.
A majority of traders expect the Fed to raise its benchmark rate by half a percentage point at its September policy meeting, according to CME Group’s FedWatch Tool. They are betting rates could reach 3.5% to 3.75% by the December meeting, leaving richly valued parts of the market vulnerable.
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“In an environment where the Fed is still going to have to be somewhat aggressive to control inflation, it’s going to be difficult to put in and then sustain new all-time highs,” said Cliff Hodge, chief investment officer at Cornerstone Wealth Group.
Some investors with a more cautious view take the strengthening breadth indicators to signify that stocks have climbed to levels above their fundamental value. The S&P 500 is trading at 18.6 times its earnings over the next 12 months, up from 15.3 in mid-June, but down from roughly 21 at the end of last year, according to FactSet.
“From a short-term perspective, you could consider the reading as being quite overbought,” said Katie Stockton, founder of Fairlead Strategies and portfolio manager of the Fairlead Tactical Sector exchange-traded fund, referring to the portion of stocks above their 50-day moving averages.
Other signals of breadth health aren’t flashing as powerfully. Although the share of companies reaching 52-week highs is on the rise, those numbers have only returned to levels from earlier this year. On Aug. 15, for example, 34 stocks closed at a 52-week high, the most since April. That total pales in comparison with 2021, when the figure frequently reached triple digits.
According to technical analysts and investors keeping an eye on charts, the S&P 500 is at a crossroad as it nears its 200-day moving average. The benchmark is currently trading under the longer-term trend and the 200-day moving average is still on a downward trajectory.
“We’re bumping up against the moving average and that is a really convenient place for this to pause,” said Jeff Buchbinder, chief equity strategist for LPL Financial. “Frankly, we think the market has gotten a little bit ahead of itself in the very short term and needs to digest these gains. If the S&P can break its 200-day and hold, that’s when you probably get a lot more people in this market.”
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