The stock market is trying to claw its way out of the hole. There is more work to be done before anyone can do a victory lap.
For starters, it has been a brutal selloff this year. The S&P 500 is down 17% from its all-time high, hit in early January. The decline has been driven by the Federal Reserve—attempting to fight rapid inflation—reducing liquidity to fixed-income markets to lift interest rates across the board. Higher rates produce lower economic demand and they also make future profits less valuable, causing equity valuations to plummet.
Recently, though, the market has enjoyed a convincing rally that could signify it has seen its lowest level of the year. The S&P 500 is up about 9% from its intraday low for the year, hit in mid June. It’s not just the gain that has been convincing. The index, at just over 3970, has crossed a key level, its 50-day moving average of 3919. That means the index is back at a level consistent with a longer-term trend—a higher trend. It means market participants are more comfortable buying stocks at more elevated prices.
That vote of confidence in the market comes as investors are eyeing a few potential positive developments. One is that inflation may have peaked, especially as commodity prices have declined in recent months. That means the Fed could soon slow down the pace of interest rate hikes. “You’ve seen a relief rally,” said Tom Essaye, founder of Sevens Report Research. “The Fed maybe being slightly less hawkish than you think [is the hope].”
That all may sound rosy, and the market still isn’t on the strongest footing. All it would take to send the S&P 500 below its 50-day moving average would be a few days of selling. The next level to watch would be just above 3700. That’s where buyers have promptly stepped in several times in the past few years to send the index higher. If the index falls below that level, it could mean even steeper losses as confidence in the market outlook wanes. “One should still tread carefully until more evidence of a floor emerges,” wrote John Kolovos, chief technical strategist at Macro Risk Advisors.
Now, the market needs to show even more signs of strength before anyone can believe it has already hit bottom. The next level the S&P 500 needs to rise to is roughly 4100. There, sellers came in to knock the index lower a few times in late May and early June. If it surpasses that level, it indicates people are even more comfortable buying stocks—and Kolovos says the index could see more gains from there.
The stock market is at a bit of a fork in the road. Its next big move will be telling.
