Investors Wonder If Any Rally Can Stick as S&P Surrenders Gains

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(Bloomberg) — The stock market’s quick burst out of the gate Wednesday morning faded just as fast, sending more than 300 S&P 500 Index stocks lower in less than two hours, meaning investors seeking a bottom in the market probably should keep looking.

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That’s what a batch of technical indicators are showing. While stocks may rise in the next days and weeks, there are still some thresholds to hit before a rally starts.

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Wednesday’s initial blast of enthusiasm was based on data showing that consumer prices in February rose at the slowest pace in four months, which presumably gives the Federal Reserve reason to cut rates sooner than anticipated. But inflation is no longer the key driver for investors. Growth is, as are the trade threats from President Donald Trump’s tariffs. And on that score, investors are still playing defense.

“CPI is irrelevant,” said Patrick Fruzzetti, portfolio manager at Rose Advisors. “It’s all about growth now. What the tariff news is day-to-day is what drives markets. These swings will be with us for a while until there are new trade agreements, but I don’t see that happening anytime soon.”

From a technical standpoint, the S&P 500 is struggling after snapping its two-year long uptrend this week. Chart watchers say it needs to recapture its 200-day moving average, which currently sits at roughly 5,737. The index is currently trading around 5,580. Technicals also show the S&P 500 already at oversold levels, indicating that Wall Street has turned bearish on stocks. 

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So the question is, can any rally stick right now? 

“We are not dip-buyers here,” Stuart Kaiser, Citigroup’s head of US equity trading strategy, told clients late Tuesday. He still sees risk in high-priced technology stocks, and there is less of a chance of a Trump or Fed put emerging with the president warning that Americans may feel a “little disturbance” from the trade wars with Canada, Mexico and China. 

In terms of index levels, traders can’t rule out a move to 5,500 in the S&P, according to Mark Newton, head of technical strategy at Fundstrat Global Advisors. “That would equate to double the initial length of the decline from December 2024 to January 2025, when measured from mid-February,” he said.

Here’s a look at what technicals say about where the US stock market is headed:

The S&P 500’s 14-day relative strength index slid just below the key 30 level on Monday for the first time since October 2023. About 25% of the index’s shares are above their 20-day moving averages through Tuesday’s close, another sign that investors have turned bearish. Before sounding the all-clear signal, traders typically look for less than 10% of the index’s shares to be above their 20-DMAs. 

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Chart watchers deem stocks as oversold when prices fall so far, so fast that there is little room to go lower. But more improvement in technical signals like breadth and volume are needed to confirm that the latest bout of market pain has passed. About 38% of stocks in the S&P 500 trade above their 200-DMAs. Typically, that figure would need to drop below 20% for traders to believe stocks have capitulated, according to Ari Wald, senior analyst at Oppenheimer. 

What happens over the coming weeks — including the Federal Reserve’s interest-rate decision on March 19, “triple witching” (the simultaneous expiration of stock options, stock index futures and index options that amplifies volatility) on March 21, and end of month portfolio rebalancing — will all be crucial in determining if bears drive stocks even lower from here.

The tech-heavy Nasdaq 100 Index fell 4.3% below its 200-DMA on Tuesday, after snapping its second-longest streak above its long-term support line last week. Breaching 5,665 on the S&P 500 — its July highs — is the difference between equities being stuck in sideways trading or feeling more pain from here, according to John Kolovos, head of technical strategy at Macro Risk Advisors. 

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“We’re gearing up for a sizable rally,” said Kolovos. “But the speed of the decline will likely leave scar tissue,” he said.

To Craig Johnson, chief market technician at Piper Sandler, bulls will have the upper hand once again if the S&P 500 tops its 50-DMA around 5,975, which sits more than 7% above Tuesday’s close.

“Investor sentiment has become so extremely bearish that it’s bullish,” said Johnson. “It’s insane that people are feeling gloomier now than when the world shutdown during the pandemic in 2020. This isn’t a crisis.”

Chart watchers want to see moves supported by broad volume rather than just a handful of companies pushing major indexes higher. The Arms Index, also called the Short-Term Trading Index, or TRIN, compares the number of advancing and declining stocks to advancing and declining volume. 

Readings above 2.0 in the gauge are a sign that investors are dumping equities, while those below 0.5 suggest there’s more demand for stocks, said Todd Sohn, managing director of ETF and technical strategy at Strategas Securities. Following Tuesday’s selloff, it sat at 0.8, meaning another bout of selling may be near before the market is ready for a real rebound. 

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