Bruised Stock Bears Bust Out the Charts in Arguing the Top Is In

(Bloomberg) — A chart breakdown within the S&P 500. Signs of complacency in a closely watched options gauge. Weak readings on the economy piling up. All of it’s evidence to bears that the rally in stocks is sputtering out.

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Equities declined Wednesday for the second straight day — the primary time that’s happened this yr — as investors once more began fretting over economic growth and just how rather more the Federal Reserve might raise rates of interest. It’s all been fodder for bears who had been warning that nonetheless good the rally so far this yr may need felt — bringing the S&P 500 as much as 4% higher — it wasn’t more likely to last.

“Bear markets are like a Hall of Mirrors, designed to confuse investors and take their money,” wrote Morgan Stanley strategists led by Michael Wilson. “We advise staying focused on the basics and ignoring the false reflections.”

The S&P 500 this week butted up against it 200-day moving average at around 4,000, but didn’t meaningfully rally above it amid two consecutive days of losses. It was the benchmark’s fifth such attempt over roughly the past yr to bust out above the long-term line, in accordance with John Gagliardi at Fidelity Investments.

“Possibly the fifth time shall be the charm, but every other time — the last 4 attempts — have been a fail,” he told Bloomberg TV this week. The index ended Wednesday around 3,929.

Stocks declined on Wednesday, with the S&P 500 losing 1.6% and the Nasdaq 100 dropping 1.3%. That happened as weak economic data rekindled concern over the outlook for growth — growth in producer prices fell greater than expected last month, and the drop in retail sales exceeded estimates. Plus, business equipment production slumped, with a decline in factory output wrapping up the weakest quarter for manufacturing because the onset of the pandemic.

“The US economic data was weaker than expected and is creating an emerging concern concerning the Fed funds hikes finally catching as much as the economy,” said Michael O’Rourke, chief market strategist at JonesTrading.

Bears have loads of other worrying indicators to point to, including the Cboe VIX Index — the fear gauge — dipping below 20 last week, something that up to now had coincided with a reversal in rallies for stocks. It happened in 4 prior instances because the S&P 500 rout began a yr ago — first, within the winter, then April, August and December 2022. While the VIX trading within the mid-20s has been unexpectedly common all year long as flushed-out stock positioning weakened the necessity for cover and kept emotions in check, the drop below the psychologically necessary 20 line has signaled complacency has gone too far. The gauge finished Wednesday above 20.

“It appears like a fickle begin to the week,” said Shawn Cruz, head trading strategist at TD Ameritrade. “There’s an extended method to go before we will say risk sentiment has turned the corner.”

Leveraged exchange-traded funds highlight a fading bullish impulse as well. Greater than $600 million exited the ProShares UltraPro QQQ ETF (ticker TQQQ) — which tracks triple the performance of the tech-heavy Nasdaq 100 — last week in the most important withdrawal since late 2021, Bloomberg data show. On the opposite side of the trade, the ProShares UltraPro Short QQQ ETF (SQQQ) — which provides exposure to thrice the inverse performance of the tech-heavy index — absorbed nearly $600 million in its biggest weekly influx since August.

Morgan Stanley’s Wilson is taking a look at the spread between his firm’s earnings model and consensus forecasts, which he says is sort of twice as wide because it’s ever been. It “suggests a drawdown in stocks for which most aren’t prepared,” his team wrote in a note. The foremost offender, he said, is the elevated inflationary environment which could “play havoc” with profitability. “Our negative operating leverage thesis stays underappreciated and can likely catch many off guard starting with this earnings season,” they said.

On Friday, the S&P 500 closed above its 200-day moving average but didn’t sustain it. And until it might probably meaningfully break above this necessary level, technicians will remain uneasy that the most recent attempt could possibly be just one other failed rally, wrote Bespoke Investment Group strategists in a note this week.

There are two key aspects to the present 200-day moving average, in accordance with Matt Maley, chief market strategist at Miller Tabak + Co. For one, the 4,000 level is a psychologically necessary round number. Second, it’s also right around where the trend line from 2022’s all-time highs converges.

“All of them meet around 4,000, so it’s an important technical level,” he said in an interview. “If it might probably’t gather itself inside the following couple of days and break above it, it’s going to be an issue.”

Keith Lerner, co-chief investment officer at Truist Wealth, says he’s watching the 4,100 level as a key near-term gauge.

“If you happen to were in a position to get above that, I believe the technical trends would improve,” he said in an upcoming episode of Bloomberg’s “What Goes Up” podcast. “But to date, we’ve failed there.”

–With assistance from Elena Popina and Michael P. Regan.

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