Why the rally on Wall Street will continue

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The view that the stock market rebound on Wall Street is gaining adherents that bodes well for a positive second half based on a number of technical analysis indicators.

After the worst first half since 1970, the S&P500 index has posted a 15% gain from its mid-June low, boosted by corporate profitability that beat forecasts and expectations that the world’s largest economy will avoid recession despite Fed rate hikes to control inflation.

Previous equity rallies this year have proven short-lived and more than a few believe it is still too early for optimism. For their part, Fed officials don’t miss the opportunity to stress that the central bank still has a lot of work to do to push inflation lower.

However, investors who focus on technical indicators such as spread, market momentum and chart formations for their investment decisions are seeing a more optimistic picture that reinforces their belief that the recent run will continue.

What the technical indicators are signaling

What the technical indicators are signaling is that the June low is more durable than this year’s May and March lows, meaning that the market rally should not be feared.

The spread of the market’s movement, i.e. whether a significant number of stocks are moving up or down as a group, is sending positive signals. The end of last year was a period when spread in market movements was narrowing, giving off worrying signals. It preceded the S&P 500 decline that drove stocks 21% lower in the first half of 2022.

That trend has recently reversed. The number of new highs on the New York Stock Exchange and Nasdaq was greater than the number of new lows last week for the first time this year, a constructive signal according to technical analysts.

The start of a sustained rally often occurs when stocks move upward together in large measure, according to analysts at Ned Davis Research, which upgraded its recommendation on equity exposure to “neutral” from “underweight.”

Also, the number of stocks in the S&P 500 index that are above their 50-day moving average has reached 90% recently. This mark preceded significant rallies in the index in the past with the S&P 500 gaining an average of 18.3% in the years that the 90% level was exceeded. The likelihood that the market will be at higher levels is greater when signals like this are emitted.

A market that gallops upward also tends to maintain momentum. A rise in the S&P 500 of 15% or more in 40 days has been followed by additional gains of 15.3% on average over the next 12 months, technical analysts point out.

Another major technical indicator gave a positive signal earlier this month when the S&P500 erased 50% of its losses in the first half of the bear market. Not since World War II has the index recorded a new low after such a move, according to historical data from CFRA Research.

The Opposite View

There is, of course, the opposite view, as expressed by analysts at Citigroup. Who believe that selling stocks if the race shows continuation will be a justified tactic, as the S&P 500 has already surpassed the house’s target for the end of this year at 4,200 points. Indeed, three previous rebounds in the S&P 500 this year have been reversed with the index making new lows.

However, technical analysts insist that its move this time around could be different, suggesting that its recent strength is more likely to carry new momentum.

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