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Call it a Comeback

Call it a Comeback

November 06, 2023

Key Takeaways:

  • Oversold conditions and tumbling interest rates have brought buyers back into equity markets this week. The S&P 500 has recaptured its closely watched 200-day moving average (dma).
  • Historically, index returns following a move back above the 200-dma have yielded positive but underwhelming returns, suggesting crossovers should be used more as a confirmation of trend than a binary trading signal.
  • Seasonal tailwinds could keep this recovery moving forward. The S&P 500 has generated an average return of 7.0% from November through April, marking the best six-month return period for the market since 1950.
  • While the comeback in stocks this week has been constructive, there is more technical work to do before considering that the correction is complete. Specifically, we are watching for the S&P 500 to clear resistance at 4,400, for market breadth to expand, and for 10-year yields to reverse their current uptrend.

What a difference a week makes! The S&P 500 has strung together four straight days of gains and is set to snap a two-week losing streak. Oversold conditions, solid earnings, hope for an end to the Federal Reserve’s rate-hiking campaign, and a sizable pullback in interest rates have brought buyers back into the market this week. Thursday’s 1.9% rally—powered by above-average volume and broad-based buying—pushed the index back above its closely watched 200-dma at 4,248. While we view this as a step in the right direction, a close above 4,400 would be required for the index to reverse its emerging downtrend. Furthermore, market breadth has been underwhelming amid the latest bounce, as less than half of the stocks within the S&P 500 are trading above their 200-dma.

S&P 500 Recaptures its 200-dma

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Crossover Performance

What does this mean for stocks going forward? Of the 216 times the S&P 500 crossed back above its 200-dma since 1950, forward three-, six-, and 12-month returns have averaged only 2.3%, 3.0%, and 4.7%, respectively. While these returns are a bit underwhelming, the latest crossover occurred after the index spent six days below the 200-dma, placing it in the third quintile group based on the number of days spent below the 200-dma before a crossover. Historical returns in this group have been higher on a 12-month basis, averaging 6.5%. Overall, we believe this data suggests price crossovers above the 200-dma should be used more as a confirmation of trend than a binary trading signal.

View enlarged chart

Seasonal Tailwinds Return

Seasonal tailwinds could provide an additional boost to stocks into year-end. The S&P 500 finished the ‘Sell in May’ period this week with a modest 0.6% price gain. Historically, this six-month stretch has been the weakest for the index, averaging only a 1.6% gain. Fortunately for investors, the next six months look much better from a seasonal standpoint. The S&P 500 has generated an average gain of 7.0% from November through April, marking the best six-month period for the market since 1950. Furthermore, the S&P 500 has finished higher during this timeframe 77% of the time, marking the highest positivity rate across all other six-month periods (the second is December to July at 71%).

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While the recent technical progress should help restore market sentiment, and the S&P 500’s move back above the 200-dma is clearly a step in the right direction, more technical evidence is required to affirm the lows of this correction have been set. Specifically, we are watching for: 1) the S&P 500 to reverse its emerging downtrend with a close above 4,400, 2) breadth to expand with at least half of the index constituents getting back above their 200-dma, and 3) for 10-year yields to reverse their current uptrend with a move below 4.35%.



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