Stocks rocketed higher again this morning as the market continued its major 2-day rally. The Dow, S&P, and Nasdaq Composite all gained while yields slid. The 10-year Treasury yield dropped to a daily low of 3.56% before recovering slightly.
The question now is whether the gains will actually stick. Investors witnessed a similar rally in early September that saw the S&P rise more than 5% over the course of 4 trading days prior to a massive one-day selloff that erased nearly the entirety of that 5% gain.
The index then plunged in the weeks that followed.
Will lightning strike twice? Wall Street remained very vague in notes to clients this morning so as to not look foolish if the market went against them.
“After falling more than 9% in September and extending its year-to-date decline to nearly 25% as of Friday’s close, we think the S&P 500 was looking oversold,” said UBS Global Wealth Management chief investment officer Mark Haefele. “In addition, some of last week’s selling pressure may have been driven by quarter-end rebalancing, which has now ended.”
Haefele continued:
“With sentiment toward equities already very weak, periodic rebounds are to be expected. But markets are likely to stay volatile in the near term, driven primarily by expectations around inflation and policy rates.”
Haefele’s not just right, he’s “double right.” The market looked ready for a bounce after being very oversold in the short term. And rates have absolutely controlled the market’s destiny over the last few weeks. As the 10-year Treasury surged, stocks fell. Now the opposite is true.
Elsewhere on Wall Street, technical analysts attempted to make sense of the current situation.
“For the S&P 500, watch for a potential resistance range of 3800-4000 on further rally efforts,” said Janney analyst Dan Wantrobski in a note.
“Beyond that, the declining 200-day MA […] currently resides at 4200- and we would note that this offered stiff resistance to the June rally just a few months ago.”
Wantrobski warned clients that if the rally of the last two days ultimately fails, significant downside – all the way down to 3,100 for the S&P – could await investors.
“Continue to watch for first support within the 3500-3600 zone, followed by 3100-3200 (which we would consider a wash-out range given the extremes in sentiment we have already experienced),” he explained.
Wantrobski’s advice, while well-informed, is also kind of useless for traders at the moment. A “resistance range of 3800-4000” for the S&P is a huge window, representing a difference of about 5% between the two prices. Bears could get eaten alive if they buy puts at 3,800 expecting resistance to hold, only for the S&P to march on through to 4,000 provided this rally is the real deal.
Instead, traders should watch for another close higher this week. If the S&P can take out today’s high by a significant amount, odds seriously favor a continued short-term rally. If the index falls again tomorrow, a bear market continuation would likely result.
Keep in mind that October’s seasonal tendency is bullish, especially toward the second half of the month. Until we get there, though, it’s probably going to be a wild (and possibly even more volatile) ride.
