US equities experienced a minor recovery on Monday, but several institutions specializing in technical analysis have cast doubt on the sustainability of this rebound, cautioning that the market may face a volatile and weak summer season.
Mark Newton, Head of Technical Strategy at the independent market research firm Fundstrat, stated in a report following Monday's session that the day's gains resembled a "dead cat bounce" rather than the establishment of a trend-based bottom. He pointed to the S&P 500 Cycle Composite model, indicating it shows the market is nearing a cyclical peak and is expected to remain weak at least until late July, with downside risks potentially extending into October.
Looking at the specific data, the Nasdaq Composite Index rose 0.9% and the S&P 500 Index edged up 0.3% on Monday. However, compared to the substantial declines of 4.2% and 2.6% respectively seen last Friday, the rebound appears notably weak.
Newton noted that the S&P 500 had rallied as much as about 1% intraday before giving up those gains to close below its opening price. More concerning, he highlighted that declining stocks outnumbered advancing ones, indicating negative market breadth, and trading volume was significantly lower than during Friday's sell-off. He stated:
"Both the S&P 500 and the Invesco QQQ Trust (QQQ), an ETF tracking the Nasdaq-100, closed below their opening prices. This closing pattern suggests a high probability of testing and breaking below last Friday's lows in the near future."
Cyclical Model Signals a Peak
The S&P 500 Cycle Composite model Newton references integrates historical seasonal patterns and calendar trends into a single predictive path for the market. He indicated this model has signaled a top near current levels and has turned negative.
Newton acknowledged that the cyclical model is not infallible, as it signals the timing and direction of a turn rather than its magnitude. However, he emphasized that the broad market index cycles turning weak from projected highs, combined with last Friday's massive unwinding of growth stock positions and the market's still-stretched positioning, collectively provide strong evidence supporting a volatile and weak summer market.
Regarding specific price levels, Newton anticipates the Nasdaq 100 Index could retest its mid-May low of 7,333 points in the near term. If the selling intensifies, a further decline into the range of 7,135 to 7,250 points is possible.
Citi Technical Signals Align With Bearish Outlook
Echoing this cautious stance, a technical analysis team at Citi led by Daniel Tobon has issued similar warnings. Their report points out that the Nasdaq 100 Index, the Philadelphia Semiconductor Index (SOX), and the S&P 500 Index all formed a "bearish engulfing weekly" pattern last Friday, where the week's price range completely engulfs the prior week's range and closes lower, signaling increased selling pressure.
Citi's analysis suggests that historical data shows a higher probability of market weakness over the subsequent two weeks when both the Nasdaq 100 and the S&P 500 trigger this pattern simultaneously. While the exact magnitude of decline can vary, the overall downward trend tends to be clear.
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