(Updates market moves) By Lewis Krauskopf NEW YORK, Aug 19 (Reuters) - The rebound in U.S. stocks isgaining believers among investors who study market trends,bolstering hopes for equities in the second half of 2022. After notching its worst first half since 1970, the S&P 500has bounced some 15% from its mid-June low, fueled bystronger-than-expected corporate earnings and hopes the economycan avoid a recession even as the Federal Reserve raises ratesto tame inflation. Past rallies in stocks have been short-lived this year andmany market participants believe it is too early for optimism.Federal Reserve officials have gone out of their way toemphasize that the central bank has plenty of work to do inbringing down inflation, and the coming week's symposium inJackson Hole, Wyoming, could see them once again push back onexpectations of a dovish monetary policy pivot, one narrativethat has helped lift stocks. The S&P 500 closed down about 1.29% on Friday, ending astreak of four straight weekly gains. Still, those who look to market phenomena such as breadth,momentum and trading patterns to inform their investmentdecisions see a more optimistic picture, and are growingconvinced the recent gains in equities are unlikely to fade. Several indicators "really suggest that that low we had inJune is certainly more durable than the low we had in May orMarch," said Willie Delwiche, an investment strategist at marketresearch firm All Star Charts. "It's a rally that can be leanedin to, not one that needs to be feared at this point." Among these are measures that show the "breadth" of a marketmove, or whether a significant amount of stocks are rising orfalling in unison. A period of narrowing breadth late last yearcame as a worrying sign to some investors and preceded the startof a decline in the S&P 500 in which stocks fell nearly 21% inthe first half of 2022. That trend has reversed recently. The number of new highs onthe New York Stock Exchange and Nasdaq surpassed new lows lastweek for the first time this year on a weekly basis - anencouraging sign to Delwiche and other strategists.
"The beginning of sustainable rallies usually starts with alarge percentage of stocks rallying together," said Ed Clissold,chief U.S. strategist at Ned Davis Research. The firm recentlyincreased its recommended exposure to U.S. equities to "neutral"from "underweight" as some indicators turned positive. Additionally, the number of S&P 500 stocks above their50-day moving average recently hit 90%. The signal has precededbig moves in the S&P 500, with the index gaining an average of18.3% in the year after the 90% threshold is hit, data fromBespoke Investment Group showed.
"The probability that we are higher in a year is much higherwith that flashing," said Todd Sohn, technical strategist atStrategas. A market that is galloping higher also tends to sustain itsmomentum. A rise of 15% or more in the S&P 500 within 40 tradingdays has been followed by an additional average gain of 15.3%over the next year, Delwiche said.
One important technical indicator was hit earlier thismonth, when the S&P 500 recovered 50% of its bear market pricedecline. Since World War Two, the index has not gone on to makea new low after such a move, according to Sam Stovall, chiefinvestment strategist at CFRA Research. Some indicators do not support more gains. Analysts at BofAGlobal Research said that stocks have historically bottomed whenthe sum of inflation and trailing price/earnings was less than20. That number currently stands at 28.5, the bank wrote onWednesday. At the same time, the U.S. Treasury yield curve typicallysteepens around market bottoms, according to Strategas' Sohn.The current shape of the curve, however, shows yields forshorter-dated bonds exceeding those for many longer-dated ones,a sign that has preceded past recessions. (LINK) "We would say that tactically selling into further strengthis justified," Citi strategists wrote earlier this week, notingthat the S&P 500 had already rallied through their year-endtarget of 4,200. Indeed, three previous bounces in the S&P 500 this year havereversed to result in the index marking new lows. But Delwiche, of All Star Charts, believes this move may bedifferent. "It's more likely that we see strength beget strength," hesaid. (Reporting by Lewis Krauskopf in New YorkEditing by Ira Iosebashvili and Matthew Lewis)
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